Whether you are a resident of the UK buying a property overseas or an international investor buying in the UK, you will have to perform one or more currency transactions to complete your property purchase. The issue needs serious planning, especially if you are buying a new development 'off plan' where you are required to make several 'stage payments' during the construction of your property.

For illustration purposes, let us assume that you are UK resident buying a new villa in Spain. The developer will require a deposit in Euros straight away, and then further "stage payments" during the construction over the next 18 months, with a final payment upon completion. You will know the price of the property in Euros and this should not increase unless you upgrade the specification of the villa.

The actual cost in Sterling will be determined by the timing of your currency purchase. Naturally, if Sterling strengthens during construction, the cost will decline but if the Euro strengthens then your costs will increase - i.e. a stronger Euro means your property will be more expensive! (This will also apply to those purchasing a straight 're-sale' property where there is a gap between the offer being accepted and the completion of the sale).

To illustrate the potential volatility:

A property priced at €200,000 would have cost £129,870 in January 2003 but increased in cost by £12,980 to £142,850 by May (10% increase in just 5 months).

Currency Exchange
Your strategy is semi-dependent upon where your sale currency (Sterling) is held and whether you have access to all or part of the money at the outset (you may be financing part of the purchase with a re-mortgage of your UK home or awaiting the proceeds of share sales etc). If you have full funds available you have two choices: one 'risk free' and one 'high risk'. The 'risk free' solution would be to buy all of the Euros now, thus fixing the cost at the outset (because you will not only know the price of the villa but also the cost of the Euros to pay for it). This is called buying currency for 'spot'. You can then deposit the bought currency to earn some interest and send payments to the developer as requested.

The 'high risk' strategy would be to buy the Euros each time that you are required to send them to the developer. This means that you have no idea what the property is going to cost, which could induce some sleepless nights ahead, especially if you are on a tight budget.

What happens if you want to 'play safe' but do not have all of the money at the outset? There is a solution that is used daily by international businesses to protect their profit margins: buy one or more 'forward contracts'.

In essence, a 'forward contract' means that you can buy the currency now, and pay for it later (when you need to make the individual stage payments). You will be required to pay a 10% deposit now and the 90% balance upon the maturity of the contract. For example, if you wish to buy £50,000 worth of Euros but do not need to send them for 3 months, you can agree the exchange rate now, place a £5,000 deposit, and pay the remaining £45,000 balance in 3 months. If the exchange rate moves at all in that 3-month period this will not affect you at all, as you have bought currency at the originally agreed rate. You may actually fix a rate on all your currency requirements up to 18 months forward.

If you have strong views about future exchange rates, you could wait to buy your currency at some stage between agreeing to purchase the property and the date that currency is required. This applies to either buying (and paying for) all of the currency (a spot trade) or fixing a rate (a forward contract). Either way you are exposing yourself to currency risk.

Remember: You would never agree to buy a property in your country of residence if you did not know how much it was going to cost you; if you agree to buy an overseas property without fixing the exchange rate at the outset, you are taking a gamble.