Currency Exchange Rate in Spain

Can Currency fluctuation affect your buying power?

You have found a property in Spain. It is for immediate sale. You are able to buy it outright. The price is 200000 Euros. Your bank quotes you an exchange rate of 1.65 to £1, which equals £121212.12. It takes a month to finalise the paperwork. You then give your bank the go-ahead to buy the 200000 Euros. But instead of asking you for a total of £121212.12, the bank demands £126582.27; an additional £5370.15 due to currency fluctuation.
During the four weeks since the bank quoted its exchange rate of 1.65 Euros to the £1 the Euro has strengthened as a result of currency fluctuations. Now £1 buys a mere 1.58 Euros (It could have been worse and could have happened faster).
You were aware that the foreign exchange market fluctuates from time to time. But never for a moment did you anticipate such an adverse change in such a short time. Even if you were aware of the risk, you were unaware you could protect yourself against it. No one at the bank mentioned the subject. No-one referred to 'stops' and 'limits', the automated mechanisms which big business uses as a matter of course to protect their money when undertaking foreign currency exchanges. Nor did you have any idea that you might have been able to find a more advantageous rate than 1.65 to the £1 in the first place.

Can you get the best currency exchange rates?

Let's look at this all-important question of the currency exchange rate. The rate offered to you by your bank is not the one and only currency rate available. And it certainly won't be the best, simply because the major banks make their money out of dealing in corporate millions, not by dealing in the sort of sums that buy an attractive overseas property. Shopping around does pay dividends.

Can you protect your capital?

The earlier property-buying scenario gave you some idea of the volatility of the foreign exchange markets.

How can you protect your capital against such an eventuality?

Your chosen foreign currency provider should offer you all the financial mechanisms such as 'stops', 'limits', 'forward contracts' which corporations use automatically to protect their capital. They should illustrate how they work with straightforward examples in a moment.

Buying outright:

Most property deals by their nature take a certain amount of time. However, if an opportunity comes 'out of the blue' and you have to seize the moment here and now, your foreign currency provider can carry out a spot transaction. 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?

'Forward' transactions:

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 option. We'll show you how each one works.

Forward pricing in practice: the 'fixed forward' Let's deal with the fixed forward. This 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 in every 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 provide your foreign currency provider with all the information, and he or she will be able to offer a price for each of those staged payments on a guaranteed basis.

Forward pricing in practice: the 'forward Time option' It's possible, however, that you know little more than the final price of the property and the developer has promised your house will probably be ready to move into in eight months' time. In this case your foreign currency provider should give you the option of fixing and guarantying a price in the future without restricting you to a fixed date for you to take delivery. For example, having the ability to draw 200000 Euros between September 1st and September the 15th.

Finally do make sure that the foreign currency provider you deal with keeps the whole process as simple as possible. Do not let technical jargon come in the way of your dealings with a currency provider because in reality the whole process be it spot deals or forwards is actually a simple product. Our suggestion would be to avoid foreign currency providers that try and make the whole process sound more complicated than it really is in order to make you feel that you cannot move forward without them. All the different contracts mentioned above are simple basic products and their strength in obtaining the best rate should be communicated to you in a simple transparent manner.

Having chosen your Spanish Real Estate Agent and a Lawyer, the next important process is making sure that you find a foreign currency provider that will guide you in purchasing your Euros. It is important to make sure that the all round service you get is simple and jargon free but effective enough to give you all 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.