Brits abroad have their own reputation, but one stereotype that is undeniable is that they love to escape to the sun. Fullfact reports that over 5.5 million Brits live permanently abroad, which is around 1 in 10 people. Of this, about 1.24 million are in the EU, whilst only ~250,000 of those are retired. So, whilst they love the sun, it’s not necessarily true that all expats are retired – but there are a lot.
Spain is the most popular destination for British expats and particularly retirees, with Ireland, France, and Germany coming in respective order. There are lots of reasons for retiring abroad, but weather and cost are undoubtedly the biggest two reasons. After a lifetime of hard work and some savings, picking up property in Spain is a popular way to get rid of the mortgage and free up some expenses.
The average price per square meter of property in the UK is £3,000 (currently ~€3,550), whilst Spain’s average is €2,550. Furthermore, retirees tend to be attracted to the south and southeast coast, away from the cities, where the likes of Murcia have an average of €1,299 per square meter – almost a third of the UK average. Italy and France can often be this cheap too, particularly in more rural areas.
There is one severely overlooked and under talked-about problem when it comes to retiring abroad, and that is currency management. It’s easy to forget about because we’re not always presented with different options and education that makes us aware of just how much money retirees are throwing down the drain each year. International money transfer will become your most important tool.
The hidden cost of using a bank
The expat money sink starts and ends with the reliance on banks. It makes sense, that you want your British pension to be paid into your secure British bank account, and you use your savings in a bank that’s insured to cover the loss of your deposit of up to £85,000. Selling your UK home is stressful and expensive too, often putting currency exchange to the back of the mind as you just focus on making sure the sale goes through and into your secure bank.
Whilst this is understandable, using the very same bank account to transfer money internationally and purchase the overseas property is unforgivable – no, really. When browsing the international payment fees for your bank account on the website, it may sound great to have only a £30 flat fee on a transaction that could be hundreds of thousands. But, what they don’t tell you, is the exchange rate they’re going to provide is well below the market rate.
Not only are people not aware of this, but they’re often complacent in thinking it’s part and parcel of currency exchange, instead of looking at it for what it really is: a fee. Often, this exchange rate is around ~4% worse than the real rate, but it can even be over 5% in some situations. To be clear, this could mean paying £10,000 on this hidden fee for a €235,000 house – and that’s before the estate agents, legal fees, and the surveyor has had their bit. This highlights just how extortionate this exchange rate loss really is – it could literally cost more than all of your typical house purchasing fees put together.
How currency brokers can save you money
Of course, it doesn’t have to be this way. There are services out there designed to give you a fair exchange rate. In fact, there are so many currency brokers popping up that competition is fierce, which has squeezed exchange rate markups to the breadline – even forcing some of them to find other ways to monetise, like freemium and subscription models.
Generally, there are the old school FX brokers that do business over the phone and are service-orientated and there are the app-driven currency wallets. Whilst the latter is great for expat pensions, the former international money transfer service is a must for an international property purchase.
Currency brokers offer exchange fees of around 1%, but this can be squeezed even lower when transferring large sums abroad, resulting in a mere ~£1,000 to £2,000 in lost money as opposed to £10,000, as per the previous house purchasing example.
And, if you’re still wincing at losing out on a couple of grand, this will more than pay for itself when it comes to the level of service you receive. A dedicated dealer at a broker that specialises in overseas real estate can have the right connections, timing, know-how, hedging, and ability to avoid mistakes.
Getting the best exchange rate
On the one hand, getting the best exchange rate when you transfer money abroad is a matter of finding a broker with the lowest fees and lowest markup. However, in the simplistic example of getting the best exchange rate right now. But, buying a house takes time, and exchange rates fluctuate all day, every day.
The more scope and the more volatility, the more risk there is for someone who needs to exchange. Your €235,000 property might cost £200,000 today, but if Boris Johnson says a few silly things and some bad bad news coming out of the European Central Bank, suddenly that house could cost you £230,000 within a week.
In order to protect against this, a currency broker will lock in a hedging contract – but only once the appropriate legal paperwork comes through. The last thing you want to happen is to commit to a Forward contract of £200,000 that you cannot fulfill. Again, this kind of thing is best left to the expert, because trying to time the market yourself is a huge gamble. Any slight changes within the day could be optimized by the broker, but they will likely take the cautious approach when the time scale is days or weeks.
And, if you want to fill yourself with even more confidence about your decision to purchase a property overseas, you’re actually hedging your bets when it comes to currency and assets. Having a Spanish or French house will be denominated in Euros, whilst the British pensions come through in GBP. So, if the Pound completely changes its value with respect to the Euro, for better or worse, there will be both an upside and a downside – which is at the heart of sensible financial management.