Secure Your Price by Fixing the Exchange Rate. Forward Contracts Explained.

 
Secure Your Price by Fixing the Exchange Rate. Forward Contracts Explained.

Mr and Mrs Palmer were looking to buy in France for years and they finally found a country home before Christmas in the region of Aquitaine with a price tag of €400,000.

  • They made an offer for the asking price. It was the 13th December and the rate was 1.09 so they calculated that they property would cost them £367,000.
  • A week later they signed the compromise de vente and 10 days later they were asked to pay the 10% deposit.
  • A Brexit agreement had been reached by then and despite the spread of COVID there was some supportive news for the pound.
  • On the 3th Jan the exchange rate climbed to levels of 1.12 and they decided to fix the whole price at that rate using a forward. Exchanging the funds at 1.12 meant that the property would now cost them £357,000, £10,000 less than the initial estimate.

As an average, there is a couple of months between finding a property and paying a deposit and completing the purchase. This gap can even be larger those days as the pandemic and the impossibility to travel can delay the final signature.

It is unlikely – especially with the current volatility- that the exchange rate that you had at the time of making the offer remains the same. Any changes in the market will have a direct impact on the property price agreed. Mr & Mrs Palmer were lucky, not only the rate moved in their favour but also they were ready to act immediately and take advantage of the rate move.

Unfortunately not all the transactions have this happy ending. Often the volatility leading to completion increases the cost of the property to a point that it becomes unaffordable.

Forward contracts are a good solution for those who want to manage their budget, avoiding the impact of negative fluctuations and potential loses or even –as we have seen in the example- giving you the possibility to maximise your budget!

What shall I consider when booking a forward contract?

Forward contracts are a tool available through some currency companies. They allow you to fix the rate of exchange ahead of a future payment and up to 2 years in some cases.

  • You don’t need to pay the full amount that you are fixing so it is an attractive tool for those whom might not yet have the full funds available. However you need to bear in mind that in order to fix the rate you will need to deposit 10% of the whole amount you are fixing. This is not a cost but just a deposit to ensure you will full fill the contract when the payment date arrives.
  • Once you fix the rate you won’t be able to change it. This means that if the rate moves even higher after fixing it you won’t be able to swap the fixed rate for the better rate.
  • If you need to cancel the contract you might incur in a loss if the market has moved against you.

Regardless of what your budget or circumstances are, always make sure that you factor the foreign exchange element in your transaction. Plan and be ready by opening an account with a foreign exchange specialist, such as moneycorp, before you start viewing properties.

Furthermore, opening an account doesn’t involve any cost or obligation.

Why moneycorp?

With a Platinum Trusted Service Award 2020 from independent review site Feefo and 40 years of experience in the industry, FrenchEntree has been recommending moneycorp for more than 15 years. During this time they have helped thousands of client planning the best way to pay for their property as well as supporting them afterwards with any further payment from paying bills, mortgages to repatriating UK pension payments for those who have retired to France.

Mar from Moneycorp

Furthermore, we have worked with the same person at moneycorp for more than a decade! You might be familiar with her as she often writes for our FrenchEntree magazine. She has 13 years’ experience in foreign exchange, and is a qualified European lawyer with experience in European transactions. Mar will be happy to answer any questions or enquiries to support you through these difficult times

Opening an account is really easy and free of cost. You can register online or over the phone in a couple of minutes and for FrenchEntree there are no transfer fees in any payment.

Open a free account today by clicking here.

Contact moneycorp at 020 3773 6355 or send your enquires here.

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FrenchEntrée's Digital Editor, Zoë is also a freelance journalist who has written for the Telegraph, HuffPost, and CNN, and a guidebook updater for the Rough Guide to France and Rough Guide to Dordogne & Lot. She lives in the French countryside just outside of Nantes, where she writes her blog Râler Like a French Girl, a humorous look at the English-French experience.

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