Spanish Property: Profiting from Weak Sterling

September 29th, 2009

Sterling has had a wild ride this summer, hitting people with second homes on the Continent as well as holidaymakers.

The pound tumbled early last week after the Bank of England said the credit crunch may have damaged its long-term value. It later rallied when the minutes of the Bank’s monetary policy committee were more bullish on the economy than expected, but fell to end the week at €1.09, a near six-month low, after governor Mervyn King said a weak pound was good for exporters.

Consumers are being offered myriad ways to protect themselves from sterling’s volatility – from forward contracts that let you fix your exchange rate if you are buying property overseas, to currency mortgages that promise to cut your debt.

However, brokers are notoriously bad at calling the market, so do these schemes really work?

WHAT’S THE OUTLOOK?

The pound has proved hugely volatile in the financial crisis. It had rallied almost 26% against the dollar this year — from a low of $1.35 in late January to $1.70 in early August.

Since then, however, it has slipped back, hitting $1.61 in early September and again last week. It ended the week even lower at $1.60. It remains almost 25% off a peak of $2.12 reached in November 2007.

The sterling/euro picture is similar. Since its low of €1.02, in late December, it had rallied almost 16% — hitting a €1.18 high in mid-June.

However, recovery has faltered. Having dropped to €1.09 on Friday, tourists changing currency at some airports received less than 98 cents to the pound.

Analysts at Royal Bank of Scotland and Caxton FX are among those predicting sterling has further to fall. Paul Robson, an FX strategist at RBS, believes it will hit parity with the euro within six months, while David Clements at Caxton thinks parity is likely as early as the end of next month. However, Clements thinks it will rally later this year to reach €1.15 and $1.69 by the end of 2009. “It might lose a bit more in coming weeks, but sterling is likely to regain some value into Christmas,” he said.

BRINGING BACK MONEY

Foreign Currency Direct, the broker, has seen a significant year-on-year increase in the number of Britons transferring their money back into sterling – a 29% increase in people bringing back euros from Spain and 26% from France.

Peter Ellis at Foreign Currency Direct said: “With the increased strength in the euro we have seen more and more Britons selling their Spanish property and taking advantage of the currency shift. Even with falling house prices, many people have made money by the fall in the value of sterling.”

Clements said people looking to repatriate funds should do so in the next month before sterling starts to rally again.

FIXING YOUR EXCHANGE RATE

Brokers generally offer the option of fixing your exchange rate days, weeks or months before you need the cash – particularly useful if you are buying property abroad or need to repatriate large sums of money, but want some certainty on how much you will get for your cash.

In the past week alone, World First, the broker, has seen a 40% rise in people who need to exchange sterling locking into a fixed rate, after it lost 3% against the euro and dollar.

About 90% are taking out “spot contracts” where the physical transaction happens in two days. The other 10% are booking “forward contracts”, where the rate is fixed now but the physical transaction will take place on a date in the future.

“Until now, people buying property in Europe or funding euro mortgages have adopted a ‘hope for the best’ attitude. Now, people are panic-buying for fear that the situation may get worse,” said Jeremy Cook at World First.

He added that those looking to buy abroad should try to hold off on any purchase and wait for a sterling rally. If that is not possible, book a currency option.

Like a forward contract, these protect you from the rate going down but unlike a forward contract, you benefit if the rate goes up.

For example, last week you could have secured a “worst-case” rate of €1.08 to exchange sterling for euros on November 30 with World First. If the exchange rate is higher by then, you would receive 50% of the difference. So, say on November 30, sterling is trading at €1.20, you would get a rate of €1.14. However, if the pound had weakened to €1.05, you would be able to exchange at €1.08.

You can fix a rate for up to two years. Say you bought an off-plan Spanish property last spring. At that time brokers were advising locking into a forward contract at €1.24. Today, sterling stands about €1.09 – netting you a near £22,200 saving on a €200,000 property.

You would still have saved £8,200 if you exchanged contracts in June, when the pound hit €1.18.

TAKING OUT A CURRENCY MORTGAGE

Brokers are offering currency mortgages to those buying properties in Britain as a way of reducing their debts.

A private bank – which refused to be named – and 3D Currency Management have just launched a five-year mortgage that tracks Bank rate plus 2% and has a rate cap of 5.5%. At the same time, 3D moves the loan between different currencies to try to turn a profit and reduce the amount outstanding.

“It’s about using debt as an investment,” said James Lawrence at 3DCM. “Someone will professionally manage your debt to reduce it.”

Available to those who want to borrow at least £500,000 against property in Britain, it has an annual management fee of 0.5% plus an upfront arrangement fee of about 1% – so it doesn’t come cheap.

Bear in mind, too, that you might wind up owing more than you borrowed if the currency trades go against the managers. This risk is capped at 5% of the original debt.

Ian Hart at Timothy James & Partners, an adviser, said: “You can end up owing more in sterling terms if the manager gets it wrong, which is why we consider this an investment as much as a mortgage, but 3D has an excellent record. It’s reduced debt by 4.63% in the year to date and by an average annual 3.5% since it started managing debt in 2007.”

Say you had a £1m mortgage and the exchange rate was €1.10 to the pound, the manager may transfer your debt into euros, making it €1.1m. If the pound then strengthened to €1.15, he could transfer it back into sterling, meaning your debt would now be worth just £956,000 – £44,000 less. This effective “return” is tax free.

If you are buying property abroad, funding a euro or dollar mortgage from a sterling income means you transfer only what you need to cover the mortgage and not the full purchase price. If or when rates improve, you can then transfer more.

However, Caroline Burke at largemortgageloans.com, the broker, warned that many banks would now lend in a foreign currency only to those who have income or assets in the same denomination.

Alternatively, most private banks allow borrowers to take most of the mortgage in sterling but switch a proportion into the currency of the country you are buying in to reduce the currency risk.

“Some of our clients have also decided to take a staggered approach — switching smaller portions of their loan into currency over, say, six months, so they do not switch the whole lot over at a single exchange rate,” said Burke.

COTTAGE INDUSTRY

Health service consultant Graham Sale, 56, and his American wife Mary, 48, a doctor, have transferred US dollars into sterling in tranches to buy a £580,000 Devon cottage for their retirement.

They bought their new home a week ago but started exchanging money through Foreign Currency Direct, a broker, late last year.

In total, they have exchanged $419,305 for £268,415 – at a range of rates from 1.5078 in early December to 1.7038 earlier this month . Had they done a single transfer in December, they would have received £278,091 – £9,676 more. However, had they waited until earlier this month they would have received just £246,100 – £22,315 less.

Story from Times Online

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