Making ‘cents’ of uncertainty in the Euro zone – what it means for you.

Making ‘cents’ of uncertainty in the Euro zone – what it means for you.

  - International Money Transfer specialists HiFX discuss the issues you need to consider when transferring money abroad.
 



After yet another roller coaster of a month for the Euro zone, economic instability in the eurozone continues to affect the lives of millions of people in the UK and on the continent.

With the markets in such turmoil, it’s no wonder that British expats and owners of Euro zone assets such as property are hugely concerned about how best to protect themselves from negative moves in the exchange rate, especially as the problems for the Euro as a single currency and the EU as a whole are far from over. 

Understandably, people are worried that if the situation in Europe deteriorates, the value of his/her Euro holdings will plummet and in the worst case scenario of a bank collapse, they might lose everything.

Key people affected:


-    5 million + British expats who either live or work overseas.
-    1.2 million Brits claiming pensions abroad.
-    1-2 million Brits who own overseas property.
-    The millions of Brits looking to holiday overseas.

Despite the decline of the Euro, over the past 12 months HiFX has seen an incredible 155% increase of volume in Euro sales.

Mark Bodega, director of international money transfer specialists HiFX comments “Normally when Sterling strengthens against the Euro (as it has done over the last few months) we’d expect to see a raft of Euro buyers.  At the moment though everything is counter intuitive.  So despite the recent movement its all Euro sellers.  Fear is now most definitely driving these transactions.”

So what is behind this spike?


Concerns over Europe’s banks - Due to the widely reported problems within some European Banks – expats and International property owners are  opting to move their savings and working capital back into Sterling and back into the more familiar and trusted UK Banks.   They are worried that if the situation in Europe gets worse, the value of his/her Euro holdings will plummet and in the worst case scenario the Bank collapse and he/she may lose everything.

“One client for example who owns a property in the South of France has moved €29k – his yearly running expenses – back into GBP to his UK Bank as he was concerned if the Euro continues to weaken and the bank falls he may end up having to double his yearly running expenses” says Bodega.

On 1 January 2011, UK savers were given £85,000 worth of protection per person, per firm in accordance with an EU directive. The limit for Joint accounts is £170,000. The new EU laws have enforced a standard compensation limit across Europe at €100,000. The exchange rate into pounds sterling is set and reviewed every five years. The limit from 2011-2016 has been set at £85,000. The limit from January 2016 will be £75,000.The FSCS estimates that 95% of UK savers will get back every penny in the event of a bank failure, thanks to the new rules.

Therefore it is best to spread your savings over as many savings institutions as possible - never holding more than £85,000 (£75,000 from 2016) in each. If you are one of the many people concerned, you could consider limiting you exposure to the Euro by bringing some of the funds held in Euro bank accounts back to the UK. Alternatively if your funds are in the UK, and you’re used to sending one larger amount each year to a Euro bank account to cover the costs of a property or life abroad, you might want to consider sending smaller amounts to the Euro zone more frequently to allow you to take advantage of sterling future Euro weakness.

Property owners selling up – as many European governments tackle their deficits, second home owners especially those based overseas have become easy targets for tax increases.   In addition to these tax rises, the cost of overseas property ownership has risen dramatically due to sterling depreciation. 

According to HiFX statistics, the average owner transfers £15,000 per annum to cover a range of costs including:

-    foreign mortgage repayments.
-    property maintenance costs.
-    payment of bills council tax etc.
-    topping up foreign bank accounts.

If you’re one of the many Brits already in the process of selling a property overseas who can’t afford to see the value of the Euro fall further, you might want to speak to a currency specialist like HiFX and consider using a forward contract to lock in the exchange rate on the proceeds of the sale in case the Euro depreciates further which many analysts believe is likely. 

Bodega continues: “Due to the current uncertainty in the financial markets, most of our clients are playing it safe and we have seen a 65% increase in the number of buyers hedging their currency purchase through the use of one of more forward contracts.”

In essence, a forward contract means that you can buy the currency now, and pay for it later. You will be required to pay a 10% deposit upfront and the remaining balance upon the maturity of the contract. If the exchange rate moves at all in that three-month period this will not affect you at all, as you have bought currency at the originally agreed rate.

However it’s not all doom and gloom if you’re one of the many people selling up and returning home.

Bodega continues “Many Brits who retired overseas bought their properties as holiday homes 10+ years ago and have seen the value of their property increase significantly.  As a result, and despite the depressed international property market, many have made money on their overseas property and are choosing to cash in their international assets to make the most of Sterling’s depreciation”.

Here’s an example why.  In 2003, a client bought a property near Perpignan for €150k.  The exchange rate at the time was @ 1.50.  The cost in sterling was therefore £100,000.  Despite having to drop the asking price by almost €43k, they recently sold the property for €145k and still received just over £125,000 as a result of the exchange rate differential. 

Advice for Brits who are buying a property overseas:


“Whilst we have a number of clients buying property overseas, the numbers of people doing so has fallen by over 85% since the international property market peaked in 2007.  Those that are buying are doing so predominantly in France, Spain and the USA” says Bodega.

When buying overseas, the 'risk free' solution would involve buying all of the Euros immediately, thus fixing the cost at the outset (because you will not only know the price of the villa but also the cost of the Euros to pay for it). This is called buying currency for 'spot'. You can then deposit the bought currency to earn some interest and send payments to the agent or developer as requested. 

The 'high risk' strategy would be to buy the Euros each time that you’re required to send them to the agent. This means that you have no idea what the property is going to cost until you send the final payment, which could induce some sleepless nights, especially if you’re on a tight budget.

“Due to the current uncertainty in the financial markets, most of our clients play it safe and we’ve seen a 65% increase in the number of buyers hedging their currency purchase through the use of one of more forward contracts Bodega continues.  
In essence, a 'forward contract' means that you can buy the currency now, and pay for it later. You will be required to pay a 10% deposit upfront and the remaining balance upon the maturity of the contract.

For example, if you wish to buy £100,000 worth of Euros but do not need to send them for 3 months, you can agree the exchange rate now, place a £10,000 deposit, and pay the remaining £90,000 balance in 3 months. If the exchange rate moves at all in that 3-month period this will not affect you at all, as you have bought currency at the originally agreed rate.

If you are looking to achieve a specific rate or you have strong views about future exchange rates you might want to consider a ‘market order’. This allows you to target a specific rate of exchange. The currency specialist will monitor the markets on your behalf and should the market reach your predetermined exchange rate, your currency is bought or sold automatically. Your order can be amended or cancelled at any time prior to the transaction taking place. 

Example:  Marcus works in New York and wants to transfer USD30,000 to his UK bank account in preparation for his permanent return to London but has a three month window during which to make the transfer.  At the time of setting up the market order with HiFX the exchange rate is 1.64.  Marcus believes sterling will weaken and asks HiFX to undertake the transfer if the rate reaches 1.56.  Three weeks later the market order is automatically triggered and he receives over £25,640 in his UK account.  Had he made the transfer at the original rate he would have received £1250 less.

It is easy and completely free to sign up with HiFX and the benefits of using its services include:

•    Bank-beating exchange rates online and over the phone
•    Move money, and pay people and bills in seconds
•    No hidden charges or fees
•    Fast transfers ensuring your money arrives on time, every time
•    Online account management and the ability to make transfers and track payments 24 hours a day, 7 days a week.
•    HiFX is authorised by the Financial Conduct Authority (formerly the FSA), the UK’s financial services watchdog
•    HiFX's security technology, Norton, is used by 97 of the world’s top 100 banks, giving customers complete peace of mind when transferring money.

See how much you could save.  Sign up and make a transfer today.
 
 


 
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