Overseas purchases are overwhelmed in economic doubt, legal translation and foreign mortgages. You’re fighting with tax laws that you quite possibly don’t fully understand, and dealing with agents and solicitors often through translated communication. The biggest threat however to an overseas purchase is often the currency exchange.
Given that brokers and banks all offer their own exchange rate with a spread, and quite often fixed fees, it can become a seriously big factor in your costs. If you think even just a small difference in currency spread of say, 2%, could save you $14,000 on a $700,000 property purchase.
The thing is, currency exchange spreads are often counted as a loss, instead of a cost. The mindset difference is important here. Losing $14,000 on a $700,000 deal doesn’t seem too bad, but a $14,000 cost in isolation is a huge amount. This can literally impact your ROI for years on the investment.
Money transfer companies
Currency exchange providers always existed, but it was at first only for corporations. As the globalised economy decentralises and is at the core of many regular people’s lives, currency exchange has become ever more important in day-to-day life.
Whether it’s expats collecting their salary, stay at home parents earning money on Amazon overseas selling or someone looking to buy a home abroad. The booming industry of money transfer companies has brought a new wave of fintechs that are looking to put the old dogs out of work.
Nowadays, you can receive your salary into a licensed bank such as Transferwise, get only a 0.5% fee on the transaction and receive the mid-market rate with no explicit currency spread. It far outperforms most traditional banks 3%-5% margin, plus the $30 fixed fees. Being able to pay for a coffee abroad for literally almost the real exchange rate is pretty remarkable — there’s almost no inefficiencies or friction left in this market.
How to handle a property investment with a hedge
The issue with property is that it takes a long time to process. Buying a home, even for a cash buyer, can often take 2 to 4 months. Now, imagine that you’ve agreed on the price of a British home in GBP as an American. The agreement that was made last week was for £500,000. At the time, this will have cost $646,350 at an exchange rate of 1.2927 on the 1st of December. You’ve locked into this agreement, but if your invoice is due on the 12th the week later, you would have had to pay $656,550 as the exchange rate moved to 1.3131. These calculations excluded exchange rate fees from brokers.
This is of course known as currency risk, and you must protect against it when purchasing a house. The best way to do this is to buy forward contracts, in which you can negotiate a future price now, in which the purchase will be executed in the future. This will lock in a rate, so movements in the market will no longer matter. You can also use limit transfers too, but this is still riskier than a forward.
Before going into any large exchange it’s always to look for some guidance. MTC, an international money transfer guide, offers insight into both hedging and the pros/cons of each major money transfer company.
Which money transfer companies to use
When deciding on a company, you want to not just go for a good company in general. You want one that’s good for your specific scenario. Some companies are great for small transfers, but costly for large ones and vice versa.
Moneycorp is a great company for large transfers for many reasons. Not only does it have great rates, it is one of the most respected and established companies in the UK. Not only this, but it offers great hedging services which not all companies do. There’s an app, a multi-currency wallet and it’s also great for merchants. They also have a large global presence with offices all over the world, which is handy as there may be one in the country that you’re buying a home in.
Global Reach is another great company that has no fees and is great for large transfers. They’re respected, although their global presence is slightly smaller than Moneycorp. They support 140 different currencies, so they may even cover the most exotic of house purchases, as well as some great hedging options. They’re an industry leader with over £5.5bn traded annually, so you know your money is safe with them.
There are many other incredible transfer companies, many of which are becoming popular for expats such as Revolut and Transferwise. Whilst these are great for small, regular transfers, they’re not really ideal for property investment and many other scenarios.