The hidden cost of buying property overseas: currency risk

Most overseas property buyers focus on location, price, and potential rental returns. While these are all important, one major factor is often overlooked: currency risk.

Currency movements can quietly add thousands of pounds to a purchase without the property price ever changing in the local currency. If you’re buying abroad, understanding currency risk it’s essential to protecting your budget and making informed decisions from the outset.

What is currency risk?

Currency risk, also known as exchange rate risk, is the potential for financial loss due to fluctuations in exchange rates between two currencies. When buying property overseas, you're exposed to this risk at multiple stages of the transaction and throughout your ownership.

Exchange rates are constantly moving, sometimes dramatically, influenced by factors like economic data, interest rate changes, political events, and market sentiment. These movements are unpredictable and outside your control. A currency that seems stable today could shift significantly over the weeks or months it takes to complete a property purchase. If the exchange rate moves against you, your property can suddenly become much more expensive in sterling terms.

How currency risk affects property buyers

Let's consider a practical example. You agree to buy a property in Spain for €400,000. When your offer is accepted, the exchange rate is £1 = €1.18, meaning you'd need approximately £339,000. However, economic forces cause the rate to weaken to £1 = €1.14 by the time you need to make the purchase several months later, meaning the same property now costs around £351,000 – an additional £12,000 due to currency risk.

This risk is particularly important to consider because overseas property purchases are often protracted. You may pay a deposit months before completion, leaving you exposed to exchange rate movements during that period.

Currency risk doesn’t stop at completion

Currency risk doesn’t end once you own the property. Fluctuating exchange rates can also affect:

·       Mortgage repayments if you borrow in a foreign currency

·       Ongoing costs such as maintenance, taxes, or management fees

·       Rental income, when converting foreign income back into pounds

·       Sale proceeds if you sell the property in the future and repatriate the funds

Managing currency risk

Fortunately, there are proactive strategies you can implement to mitigate currency risk. Savvy overseas buyers use specialist currency services to gain control of exchange rates, rather than relying on high-street banks. They can help you establish a clear currency strategy that provides certainty, protects your budget, and reduces stress during the buying process. Common strategies include forward contracts, which allow you to fix an exchange rate for a future date.

Before committing to an overseas property purchase, consult with a currency specialist. They can use their exchange rate expertise to help you develop a tailored strategy to manage currency risks effectively.