The confusing world of exchange rates is an area that anyone who is in the market for a foreign property would do well to understand fully. To make matters easier we have created an exchange rate primer to assist you in understanding the world’s currency.
How do currency fluctuations affect my foreign home?
If you are based in the UK and own a foreign home, with a mortgage being paid in the respective country’s currency, then our weak pound is a negative aspect. It will lead to larger repayments on the sterling than initially thought. Of course if the pound was to gain strength then the effect would be opposite and your payments would become lower.
What happens to the value of my home in the event of a falling Pound?
If the pound loses strength then the cost of your home will increase. Selling foreign property in the event of a weakening pound is always a good move, but it is a bad time for a UK based individual to be buying a foreign home.
Damage limitation
If you have mortgage payments in the currency of your income then you will bypass any problems that may arise due to exchange rates when the currency in which you pay becomes stronger than the currency in which you earn. Unfortunately this method could mean that your debt levels become somewhat erratic, your money lender may ask you to transfer your mortgage if the currency rates fluctuate aggressively and your debts then rise to disturbing highs. When debt levels become this high the risk that your property is worth less than your loan comes into play, known as negative equity.
So, if you have a mortgage in the currency of the property’s location your debt will not see-saw against the property but the cost of the payments on your mortgage will fluctuate. You may find that some brokers will allow you to put in place a fixed exchange rate, usually for a period of time, two years is often the norm.
What other traps should I be wary of?
If you are planning on selling an overseas property then make sure that you are aware of any tax implications that may arise. By selling a property abroad, even if you do not make a profit, you may find that you will have to pay capital gains tax back in the UK.