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Managing Foreign Currency Risk When Investing in Property

managing foreign currency risk

Managing foreign currency risk is a key area of concern for expats when investing in property, whether in Australia or overseas.  Foreign currency fluctuations can have a significant impact on the returns from your investment and so it is important to carefully consider how you want to manage the risks of fluctuations between two currencies.

Choose the appropriate currency for your loan

In managing foreign currency risk, it is usually prudent that the currency of your loan should match the currency of your investment, so you do not run the risk of having a loan that ends up significantly greater than the value of the property as a result of adverse currency movements.  So if you were to buy a property in Australia, you would then want to take out a loan in Australian dollars, and if you were to buy a property in Singapore, then you would want to take out a loan in Singapore dollars.

However, there are other factors that you may also wish to consider in managing foreign currency risk, such as the currency you are earning your income in now (and in the future), whether one currency will give you a substantially lower interest rate, and the relative stability of each currency.  If chasing lower interest rates, be aware that the value of the Australian dollar relative to foreign currencies is known to easily move more than 10% in one year.  So keep that in mind, if you borrow in a foreign currency simply because it saves you 1%pa in interest.

Also keep in mind that in needing to manage foreign currency risk you may need to consider the risks of short term fluctuations (eg. for making payment of a deposit on a property purchase), and long term currency fluctuations (eg. for making ongoing loan repayments over the course of the loan term).

Get the best foreign currency exchange rate you can

There is an enormous difference in the effective exchange rates offered by banks and various foreign currency brokers.  In our article, What are the best options for transferring money to Australia, we found that there can be as much as A$400 difference between companies when transferring only 10,000 euro.  When purchasing property, it is feasible that you may be transferring even larger quantities of foreign currency or Australian dollars, and so using the right foreign currency transfer company is important.

You can check out the results of our latest comparison of providers here.

Having the best exchange rate won’t always be the only criterion for selecting a foreign currency transfer company.  Firstly, depending on what currency you are transferring to or from, the company with generally the best foreign currency exchange rates may not deal in your required currency.  Secondly, often the best rates are obtained from the “no frills” companies which usually only offer real time quotes for immediate transfers.  When transferring large sums of money, and for loan contracts that may span many years, you may want access to some more sophisticated features.

foreign currency risk

Managing Foreign Currency Risk

OzForex (also trading as Ukforex and OFX) offer a range of more sophisticated features that help you manage your foreign currency risk.  For a number of these services you will need to be transferring a minimum amount of money (circa A$30,000 to A$50,000).  Also, due to the sophistication of some of these services they are often only available by talking to one of their representatives (rather than just clicking a few buttons on a website), which in my mind gives me added peace of mind that I don’t enter a transaction that i didn’t intend to, and I make sure I am using the correct service or product for my needs.

OFX have 4 different services or products that may assist you in managing your foreign currency risk.

1. Foreign Currency Limit Orders

With a Foreign Currency Limit Order, you can nominate the rate you would like to transfer money at, and OFX will lock-in the deal should your target rate be triggered.  This is a good option if you want to ensure you capture a good exchange rate but don’t have the time to monitor movements in the foreign currency exchange rates.  And since foreign currency markets operate 24 hours a day, who can?

2. Forward Exchange Contracts

Forward Exchange Contracts allow you to lock in an exchange rate now, but exchange your money in the future, and so are an excellent tool to minimise or even eliminate foreign currency risk.  This is great if you want to protect yourself from any exchange rate movements between now and when you are ready to exchange the money.  For example, if you want to make sure you will have sufficient funds to pay a house deposit at settlement in 3 months time, then this will allow you to lock in an exchange rate for a time closer to when the deposit needs to be paid.  You can often lock in an exchange rate up to 12 months in advance.  Another time this option is good is if you are waiting on the settlement of a property sale and plan to use the proceeds to purchase another house in another country.  This enables you to have the confidence of knowing exactly how much of a certain currency you will have to invest.

Forward Exchange Contracts are also useful when you know there is a significant event that could significantly impact exchange rates between now and when you wish to make a transfer.  Current examples include Australian Federal Election, Brexit vote, US interest rate decisions etc.

3. Foreign Currency Options

Options start getting more complicated for managing foreign currency risk but might be of interest to sophisticated investors, particularly when dealing with volatile currencies.  A foreign currency option will, for an upfront premium (fee), generally give you the right, but not the obligation, to transfer your money at a certain time and at a certain exchange rate.  This protects you against adverse exchange rate shifts while also allowing you to take advantage if the rate moves in your favour.   If you are considering using foreign currency options, please ensure you understand all the risks involved in using options before entering into any arrangement.

4. Regular Payments

This option is useful for making your regular loan repayments (if needing to transfer the funds from another currency).  You can usually choose to lock in the amount of money being transferred on each occasion, or the amount of money being received on each occasion.  Using this you will always have the funds available to make your loan repayments in whatever currency you require.

If you are interested in opening an account with OFX, then it can be done online for free by clicking here.

foreign currency risk

Disclaimer : This information is for educational purposes only and does not constitute financial or taxation advice. As this information is not advice and has been prepared without taking into account your objectives, financial situation or needs you should, before acting on this information, consider its appropriateness for your circumstances. Independent advice should be obtained from an Australian financial services licensee before making investment decisions, and a registered (tax) financial advisor/accountant in relation to taxation decisions. To the extent permitted by law, we exclude all liability for any loss or damage arising in any way. We may receive referral commissions from companies mentioned in this article.

About the author

Craig

Craig is an Australian Expat and the founder of The Australian Expat Investor. Craig is passionate about investing, and while Craig cannot give personal financial or tax advice, Craig enjoys sharing investing, tax, and other tips for Australian expats to help them to build their wealth while living abroad and get the most out of their time living overseas. Get his free ebook on 9 Financial Surprises That Could Cost Australian Expats Thousands of Dollars

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