When you buy a property in Spain you take on a Euro exposure – an obligation to pay someone a certain amount of Euros at a specified date in the future. Unless you already have Euros (for example because you are paid in Euros and have all your savings in Euros) you will have to buy Euros using Pounds Sterling or another currency. Therefore it is the total price of your Spanish property purchase in Pounds Sterling that matters to you most.
But because exchange rates are constantly changing, the value of your Euro exposure in Pounds sterling is constantly changing as well. The fluctuations in the Pound Sterling / Euro exchange rate can have a big impact on the price in Pounds that you end up paying. The following example using Pound Sterling / Euro (GBP/EUR) demonstrate how big an impact exchange rate fluctuations can have on your Spanish property purchase.
First, let’s see how the GBPEUR exchange rate has changed over the last five years, as illustrated by this chart.
The exchange rate went from around 1.15 Euros to the Pound in January 2011, to around 1.35 €/£ today, an appreciation of 20% in the Pound’s favour. Currencies are in constant fluctuation, which means the price you end up paying could change every day if you take no steps to protect yourself.
Of course most people don’t buy property over a five year period. A typical conveyancing process might take around 3 months. So let’s see how the GBPEUR exchange rate changed over three months to the end of December 2015.
The exchange rate went from around 1.35 €/£ at the start of October 2015, to 1.43 €/£ in mid-November, and back down to 1.35 €/£ at the end of December, a maximum change of 6% during the period. On a purchase of €200,000 that translates into a €12,000 difference depending on the date of purchase. So exchange rate movements can have a big impact on the price you pay if your funds are in another currency.
This becomes an important issue if you sign a contract to complete a purchase within a period of months. Because exchange rates are constantly changing, you don’t know how much you Euros will cost you when the time comes to complete before notary. This is particularly true when buying off-plan or under construction, when completion might be six months or more in the future.
Typically when people buy a resale property in Spain they pay a deposit of around 10% at the time of signing a private sale contract with the vendor (often buying Euros from their bank at extortionate rates), and agree to pay the remaining 90% at the time of signing of the deeds before Notary. In most cases the deeds are signed between 1 and 4 months after signing the private sale contract. This means the buyer will carry a Euro liability for a couple of months, and fluctuations in the exchange rate over even such a relatively short period can have a significant impact on the price in other currencies that the buyer has to pay.
Exchange rates introduce a significant element of uncertainty (called exchange rate risk) for foreigners buying property in Spain. The next section explains how you can reduce or eliminate foreign exchange rate risk. How can I manage my foreign exchange rate risk?
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