After choosing your Spanish real estate agent, a property to purchase and a lawyer, the next important process is making sure that you find a foreign currency provider that will guide and assist in purchasing your Euros. It is important to make sure that the all round service provided is simple, jargon free and effective enough to give you the tools necessary to ultimately save you money when buying property in Spain. Banks and independent companies in the Spanish market place provide this service.
You have found a property in Spain which is for immediate sale and you are able to buy it outright. Your bank quotes you an exchange rate and it takes a month to finalise the paperwork. You then give your bank the go-ahead to buy Euros. But instead of asking you for the anticipated amount in your base currency the bank is asking for extra due to currency fluctuation. During the four weeks since the bank quoted its exchange rate, the Euro has strengthened.
You were aware that the foreign exchange market fluctuates from time to time but never for a moment anticipated such an adverse change in such a short time. Even if you were aware of the risk, you may have been unaware that you could protect yourself against it. Probably no-one at the bank mentioned the subject. No-one referred to spots and limits, the automated mechanisms which companies use as a matter, of course, to protect their money when undertaking foreign currency exchanges. Maybe you had no idea that you might have been able to find a more advantageous rate than quoted by the bank in the first place.
Obtaining Better Rates
The rate offered by your bank is not the only currency rate available and certainly won’t be the best. The major banks make their money dealing in corporate millions, not by dealing with the sort of sums that buy an overseas property. Shopping around pays dividends.
To protect your capital from the volatility of the foreign exchange markets, your chosen foreign currency provider should offer you all the financial mechanisms such as spots, limits and forward contracts which businesses use automatically. They should be able to illustrate how they work with straightforward examples.
Most property deals by their nature take a certain amount of time. However, if an opportunity comes and you have to seize the moment, your foreign currency provider can carry out a spot transaction whereby the currency is bought in today’s market for cash.
Buying properties under development
Buying a property outright is relatively simple but what happens if you are buying a property in Spain that is no more than an architect’s blueprint and a developer’s plan? You will be asked to pay a deposit, and then to make three or four subsequent payments several months apart. You may know precisely when you have to make each payment or you may not. You may know exactly what proportion of the total price you have to pay each time or you may not.
Although the market might move in your favour during the months it will take to conclude the deal, equally, it might move in the opposite direction. Unless you take precautions at the outset, you are putting your capital at risk. How can you avoid the gamble?
You arrange with your foreign currency provider to use the mechanism that all big businesses use to protect themselves when exchanging a large sum into a foreign currency: you use what is known as a forward transaction. There are two versions: the fixed forward and the forward time options.
The fixed forward is a contract your foreign currency provider should suggest if you know in advance the dates on which you need to make your payments, and the amounts payable in each case.
Let’s say you must pay a deposit of 10 per cent of the price of the property within the next few days, another 40 per cent in 3 months’ time, another 20 per cent six months from now, and the balance at nine months. You inform your foreign currency provider with all the information, and they will be able to offer a price for each of those staged payments on a guaranteed basis.
This option should be suggested if you only know the final price of the property and an estimated completion date. In this case, your foreign currency provider should give you the option of fixing and guaranteeing a price in the future without restriction of a fixed date to take delivery.
Remember to make sure that the foreign currency provider you deal with keeps the whole process as simple as possible and does not blind you with technical jargon. These are simple products and their strength in obtaining the best rate should be communicated to you in a simple transparent manner.