Despite the economic turmoil which many countries are currently experiencing, a number of recent property reports are suggesting that the world's real estate markets are starting to pick up and once again offer the potential for rich rewards.
Investing in property overseas is a process which involves a significant outlay of cash and as such, keeping any unnecessary costs to a minimum should be seen as an important move for potential buyers.
Whether individuals decide to pay cash for property or take out a mortgage in the local currency, it is important to consider the influence that exchange rates will have on any transaction.
The measure is perhaps one of the most important elements of any real estate purchase, as investors can save a small fortune by simply keeping an eye on the market and knowing how exchange rates can work for them. Timing also manifests itself as a crucial factor and getting it right could make a huge difference, sometimes leading to thousands in potential savings.
Getting the budget right
Setting a maximum budget should be the first task for any budding investor - despite this sounding like a simple enough task, many aspects require assessment.
When purchasing real estate overseas, buyers are unlikely to be paying just the set fee for a property, as currency rate fluctuations, fees, charges and taxes must considered and paid before title deeds can be exchanged.
Where to buy currency?
While banks do offer the service, it may be worth looking at a specialist currency firm to complete transactions. The organisations are generally tailored to work in favour of people who make international money transfers and as such, can have a number of advantages over high street banks.
Generally, specialist firms offer a more competitive exchange rate and can save buyers up to three per cent on their transfers. Added to this, they typically offer a reduction in transfer fees, which will allow investors to transfer their money around more for less, in comparison to a bank.
Protection is also offered against adverse currency movements, with individuals able to take advantage of favourable rates.
Currency market fluctuations
Changes in exchange rates occur often and it is not unusual for currencies to appreciate and depreciate against each other many times each day. Fluctuations of up to ten per cent are not uncommon and getting it just right could be the difference between being able to buy a dream property or just missing out.
If, for example, between agreeing to purchase a property and actually paying for it, the rate moves against you by ten per cent, the price that you will be paying will effectively be ten per cent higher than the one you agreed.
As such it is recommended that any currency exchange is completed early to avoid the likelihood of this happening - the good news is, however, that you can protect yourself against negative currency exchange rate fluctuations.
A spot transaction is a good option for investors who already have the funds needed to purchase property and want to protect themselves against possible currency fluctuations. The lender will hold the rates at the same level for a short period of time - usually one or two days - and funds can be transferred when required.
Almost the opposite of a spot transaction, this deal works on a 'buy now, pay later' basis. With a forward transaction, the exchange rate can be fixed at a certain level for an agreed timescale of anything up to 12 months in the future. Buyers have to put down a deposit, generally a minimum of ten per cent, and pay the balance as agreed in the contract.
If a decision is made to take out a mortgage, overseas property investors will be expected to make regular mortgage payments. Although small, the cost can add up over time if research is not conducted into the best foreign exchange deals.
Many currency specialists offer services which can provide competitive exchange rates and low transfer fees. Over the course of a year there is the potential to make small, but significant, savings.
The recent unpredictability in currency markets has kept traders entertained and many economists predict that more volatility is to come.
In particular, the Euro has been attracting much sceptical feeling, with many unsure that recent bailout measures will be effective. At the other end of the scale, the US and Australian dollars have been establishing themselves as two of the stronger currencies available and many investors will have already noted this.
Whatever market investors decide to opt for, it is important to bear in mind all of the costs associated with buying property, as legal, financial and exchange rates will all have a large influence, making it important to shop around and find the best deal available.
But with currency fluctuating as much as it is at the moment, now may be a good time to buy your currency ahead of time, utilising forward transaction schemes.
- Thursday 17 June 2010