If you have spent any time at all searching for property in Spain online you will already have undoubtedly seen many adverts for currency exchange.
When I was working as an estate agent I would receive at least one sales call a week from a rep of a currency exchange company trying to convince me to promote their service in return for substantial introduction fees.
While the role of a currency broker is extremely valuable, this is another situation where your own research is important rather than relying on an agent's introduction.
Here I will break down the role of the currency exchange companies, explain why they are useful and the services you can expect from them.
What does a currency exchange company do?
Firstly I should clarify that I am not referring to the type of “Bureau de Change” companies that you see in airports who sell holiday money at extortionate rates, rather brokerages that specialise in the transfer of large sums of money.
The primary function of an exchange company is of course to exchange your funds from your home currency into euros. When dealing with these companies you will be typically dealing with the large sums of money involved in the purchase of a property and so these brokers offer to exchange funds at a rate that is very close to the interbank rate (the headline exchange rate that you see if you search online).
This rate is almost always far better that you would be offered by a highstreet bank, and with the large sums of money involved in a property purchase, even a tiny margin can give them a significant profit. But beyond offering very competitive exchange rates, they often provide further advantageous services, for example:
Forward Planning
Exchange rates fluctuate constantly and even small fluctuations can result in significant changes to the cost of Euros in your own currency. A 0.5% drop in the value of the pound against the euro would mean that the cost of a €200000 house would rise by around £1000.
Over the period of time that it takes to complete a property (typically 1-2 months) there is a chance that the exchange rate will vary significantly. To give an extreme example, on the 23rd of June 2016 a €200,000 property in Spain would have cost around £151,500. The very next day that same property would have cost £166,600.
While such extreme fluctuations are rare, even small fluctuations can have a significant impact. You can protect yourself against this risk by transferring funds into euros as soon as you agree to a purchase and holding them in a euro account until completion, however it is normally the case that the funds needed are not sitting in a current (checking) account and their liquidity needs to be arranged over a period of time. Most currency exchange companies will allow you to purchase Euros at an agreed rate with only the need to provide a deposit - around 10% of the total funds. Doing so enables you to be secure in the knowledge that exchange rate fluctuations will not push the price of the property out of your reach. This rate, fixed into the future, is called a “Forward Rate”
There is of course a flip side to this. If the exchange rate moves in your favour then you will have already agreed to purchase the Euros you need at the now unfavourable rate, however when balancing the risk of not being able to afford the property, and therefore losing deposits and other associated non refundable costs, against the potential benefit of a favourable change to the exchange rate, most people opt for the security of fixing the rate in advance. Of course this becomes even more relevant when dealing with off plan properties that have much longer lead times and stage payments to be made several months apart.
Spot Rates
Many brokers will also enable you to opt to purchase your euros at a specific “Spot Rate”. This means that you will deposit your funds with the exchange company and, with the help of your broker, choose a rate that you want to buy your euros. The broker will monitor the exchange rate, purchasing the euros if and when the rate hits the target you set. You can also monitor the rate yourself and instruct the broker to make the exchange when you see the rate you want.
Fixing ongoing payments.
Another service that exchange companies often offer is the option to fix a rate for regular transfers. If for example you send a fixed sum to Spain every month to cover mortgage repayments and utility bills, or if you regularly receive a fixed amount in Spain from a pension or employer, the Exchange Company will enable you to fix a rate in advance for a year. While the rate could move in or against your favour during that year, the fixing of the rate enables you to budget with confidence.
Money Laundering Compliance
Transferring large sums of money across borders into Europe results in thorough money laundering checks. The foreign exchange companies are used to dealing with this and will enable you to comply with the regulations without hindrance.
Avoiding Bank Charges
High street banks often charge a fee both for sending money to and receiving money from overseas accounts.These costs are eliminated when using FX companies. Essentially you purchase the Euros from them by sending money to an account in your home country. You then receive the Euros in Spain from their Euro account, effectively meaning that no international transfer takes place.
Choosing a FX company
FX is a competitive market and there are many operators available at any given time. I will maintain a list of reputable companies in this book's digital resources. It is worth talking to more than one broker and, importantly, letting each broker know that you are talking to more other companies. Every time they make a transaction it is treated as an individual ‘trade’ and the broker's job is to make as much money out of that trade as possible, they will have flexibility over the margin they give you and, if they think they have a competitor to beat then they will try to be as competitive as possible. If they think that you are a captive audience then they will give you a worse rate.
There are some things to keep in mind when choosing an FX company, not least their size and the security they offer. You should ensure that the company is registered with the relevant authorities in your home country - the Financial Conduct Authority (FCA) in the UK - and check with them how they guarantee your deposits.
Day to Day currency exchange
The type of service I have just described becomes relevant once you have found a property and start transferring the very large sums of money associated with the purchase.
For your day to day expenses when you are searching for a property and even when visiting on holiday it is advisable to open a multi currency account. These accounts, offered by companies such as ‘Wise’ provide you with multiple current accounts in different currencies. You may for example hold a Euro account, a USD account and a GBP account. You can then transfer funds almost instantly between accounts for a very small fee. This type of account often also offers a debit card that can be used for any of the individual currency accounts you hold, and is normally connected to an app that makes managing your money across currencies very easy. You can even set up direct debits using the account to pay your utility bills in Spain.
I thoroughly recommend having a multi currency account of this type. I use one myself all the time however I would still recommend using a specialist broker for large transactions, not just to take advantage of the rate fixing and spot rate services but also as they are far better for dealing with money laundering compliance.