Pay Less For Foreign Property - Currency Exchange Savings
There is a simple trick to saving about 4% on the price of property abroad. It is quite easy and only takes about an hour. As an example, on a $200 000 property, this means that you would save about $8 000. Not bad for an hour's work. Following is the explanation of how you do it.
If you are buying abroad, you will almost certainly need to pay in the local currency. So for example, if you are buying in New Zealand you would need to pay in New Zealand dollars or if you are buying French property you would need to pay in Euros. Unless you happen to have a sufficient amount of the local currency, this means that you will need to convert some of your money to the foreign currency.
Unfortunately, most people use a bank to do this, and almost all banks have very high fees for currency exchange. These fees take 3 forms:
- Exchange Rate. Banks do not exchange your money for what it is actually worth on the international market. So, for example, if a Euro is equal to US$1.20, they will likely charge you about $1.25 to buy a Euro. On the other hand, if you are using Euros to buy dollars, they may give you only US$1.15 for each Euro. This is how they make much of their profit on currency exchange.
- Direct Fees. In addition to giving you an exchange rate which is less than what your money is actually worth, there are a number of additional fees that may be charged based on individual circumstances. You need to read the fine print to see which ones are applicable to your particular circumstances as they vary widely depending on bank and on the nature of the currency exchange.
- Transfer Fees. Unless you are taking the money in cash, you will likely need to have it sent from your bank to a bank in the country where you are buying property. The sending bank almost always charges a fee for this and the receiving bank often charges a fee as well.
In total , this means that you could easily end up paying up to 5% of the amount just on various fees. However, if you use a specialist currency exchange company, you should pay closer to 1% total, giving you a saving of about 4%. A currency exchange specialist is cheaper because:
- Competition. Currency exchange companies, unlike banks, specialise in currency exchange. Consequently, they are set up to offer much better rates. Perhaps more importantly, competition between exchange specialists is fierce so they must have attractive currency exchange rates to compete, whereas most people using a bank simply use the same bank where they have an account, without looking around, so the banks have little competition and consequently can offer less attractive exchange rates.
- Direct Fees. Most currency exchange specialists, for large amounts, do not charge any fees.
- Transfer Fees. In general, currency exchange specialists do not charge any transfer fees. Furthermore, they often have in-country arrangements so that the receiving bank does not charge a receiving fee.
In the event that you are exchanging the full purchase price of the property, a 4% saving on the currency exchange translates to a 4% saving on the price of the property. To save this money, you need to do a bit of work in advance of buying your property abroad. The main steps are:
- Choose a currency exchange provider. There are a lot of companies that provide currency exchange. You can get a list by using the keywords 'currency exchange' in your search engine.
- Open an account. Opening up an account with a currency exchange provider is essentially the same as opening up an account with a bank. This should be done well in advance of buying your property, so that all the paperwork is sorted in advance. Opening up an account should be free and without obligation, and should take no more than an hour.
- Conversion. When you are ready to buy your property, you simply transfer the money from your bank account to your exchange rate account. Your currency exchange provider will then convert the money to the required currency and transfer it to the destination.
In addition to saving perhaps 4% of the purchase price of your house, another important advantage is the ability to lock-in a currency exchange rate. Currency exchange rates are constantly going up and down. Sometimes this will be in your favour and sometimes at your loss. While one can hope for the former, there is always the risk of the latter. With a currency exchange provider, you can lock-in an exchange rate for months in advance, so that when your are ready to convert and transfer your money, there is no risk of you losing out due to exchange rate changes. This ability to lock-in an exchange rate is another reason for opening an account with an exchange rate provider.
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