Buying property abroad: a guide to managing the currency risk

When the risk starts

Most buyers think about the exchange rate on the day they send the money. The risk actually begins much earlier, on the day a price is agreed in a currency different from the one you earn or save in.

A typical purchase runs through several stages: an accepted offer, a reservation deposit, a binding contract with a larger deposit, often around 10%, and completion, when the balance is paid. For a resale property that can take three to six months. For a new development paid in stages, it can take several years. Throughout that period the price is fixed in the seller's currency, while your budget is fixed in yours.

What a move costs

Consider a UK buyer who agrees to pay €800,000 for a villa in Spain. The table shows the sterling cost at different EUR/GBP rates.

Each one-cent move is worth £8,000, and a move from 0.85 to 0.88 adds £24,000 to the cost. Moves of that size can happen quickly: in the autumn of 2022, EUR/GBP rose from around 0.84 to above 0.92 in a matter of weeks. Local purchase taxes and legal fees are usually also paid in euros, so they carry the same exposure.

The risk runs the other way when you sell. A buyer who later sells the villa and brings the proceeds home is exposed to the euro weakening between agreeing the sale and receiving the money.

Your options

There is no single right answer. The choice depends on how large the purchase is relative to your wealth, how certain the timetable is and how much a worse rate would matter to you.

• Convert on completion. The simplest approach, and reasonable if the amount is small relative to your budget. You accept whatever the rate is on the day.
• Convert now and hold the currency. This gives certainty, but ties up the full amount early and means holding cash in a currency you may not otherwise want.
• Use a forward contract. This fixes today's rate, adjusted for the interest rate difference between the currencies, for the completion date. It usually requires a deposit, and it is a binding commitment even if the purchase is delayed or falls through.
• Use a flexible forward. This fixes a rate you can draw down across a window, which is useful when the completion date is not yet certain.
• Place limit orders. These target a better rate for part of the amount, while a forward or spot conversion covers the rest.

Many buyers combine these. For example, they fix the deposit and half the balance once contracts are signed, and leave the remainder to be converted closer to completion.

Mortgages and natural hedges

Borrowing in the currency of the property reduces the amount you need to convert and matches the debt to the asset. If the currency falls, the sterling value of the property falls, but so does the sterling value of the loan.

That match is not free. The interest rate, lending terms and your ability to service a foreign-currency loan from sterling income all need thought. If you plan to rent the property out, rental income in the same currency can help cover repayments.

The cost of conversion

The rate you are quoted is rarely the rate you see on a news screen. Banks and payment providers add a margin, and on retail transfers it can be several percent. On a purchase of this size, every 1% of margin is around £6,800.

Before you transact, ask what rate you are being quoted against the prevailing mid-market rate, and compare providers. A good hedging plan can be undone by an expensive execution.

A short checklist

1. Map the payment timetable: deposits, completion, taxes and fees, with dates and amounts.
2. Decide how much of the total you want certainty on, and by when.
3. Consider whether local-currency borrowing makes sense for you.
4. Choose the tools: spot, forward, flexible forward or limit orders, alone or combined.
5. Compare execution costs before committing.
6. Plan now for the eventual sale, and the currency risk it will bring.