There is a way to protect yourself from currency fluctuations that may increase the cost of your property.
The worldwide foreign exchange market is huge, with average daily turnover totaling approximately $3.2 trillion. In this industry, around 95% of all currency transactions are purely speculative, with the majority of trades being made by banks and institutions looking to capitalize on currency fluctuations. The remaining 5% of currency transactions are for physical delivery, i.e. corporate repatriate overseas revenue, individuals purchasing a home abroad, importing a vehicle, going on vacation, etc.
Speculators pay close attention to economic data that is made public, and will buy or sell currency depending on what they think the future value of the currency will be. This creates a highly volatile market that can cost individuals buying property abroad significant amount of money if they aren’t careful with the timing of their transaction.
Pay close attention to the rates
If you are thinking of buying a property in Mexico, you will most likely need to exchange currency at some point. In most situations, property is sold in U.S. dollars, so if you are American you may not need to do an exchange until you pay for living expenses in Mexican pesos (MXN). However, if you are Canadian you will need to buy U.S. dollars up front to purchase the property. Canadian buyers should pay close attention to the USD/CAD exchange rate, as volatility in the currency markets can have drastic repercussions on the final Canadian dollar (CAD) cost of the Mexican property.
Let’s look at an example. If you had been looking to buy a property in Mexico priced at $300,000 USD at the beginning of August 2006, it would have cost approximately $330,000 CAD, due to the exchange rate. Only six months later, in February 2007, the same property would have increased in cost to $355,000 CAD. In other words, in six months, the property became $25,000 CAD more expensive!
Fortunately, there is a way to protect yourself from currency fluctuations that may increase the cost of your property by locking in the rate of exchange ahead of time with a ‘forward contract.’ Some currency exchange specialists can lock in an exchange rate for up to two years. This service is especially useful if you have a lengthy closing period or future property payments. With a ‘forward contract,’ you will have locked in the cost of the property in CAD and will be unaffected by any volatility in the currency market. One currency specialist, HiFX, provides a ‘forward contract’ free of cost and requires only a 10% deposit.
‘Retail’ Exchange Rates vs. ‘Commercial’ Exchange Rate
When it comes time to do a currency exchange, the fact is that many individuals will simply use the exchange rate offered by their personal bank. Most banks will make a profit on this transaction by adding a “spread” to the rate of exchange, in other words, buying the currency at the “market rate” and selling it to the client at a “retail rate.” The “spread” that the bank charges individual clients is usually much higher than what it charges its commercial clients, because the size of the transaction for individual clients tend to be much smaller.
Currency specialists can offer more competitive rates and help individuals save money. First of all, currency specialists can offer individuals exchange rates that are typically available only to the bank’s best commercial clients, because currency specialists have much lower operating costs. In addition, currency specialists will not charge any wire transfer fees, commissions, or bank receiving fees. Unfortunately, many individuals do not realize that these better alternatives are available.
Therefore, it always makes sense to shop around and see who can offer the best rate of exchange to make your money go further.
For example, currency specialist HiFX has seen an average savings of 1%-4% of the transaction amount for its clients, and in addition will transfer funds free of charge. On larger transfers such as for property purchase this savings can translate into thousands of dollars.
Canadians have amazing purchasing power today
Fortunately for Canadians, now is a very attractive time to look for a property in Mexico. The CAD has strengthened heavily against the USD over the last few years, making property in Mexico even less expensive. On September 20, 2007, the Canadian dollar reached parity against the US dollar for the first time since 1976. This means that Canadians have more purchasing power now than they have had in the last thirty one years.
For example, if you were looking to buy a $300,000 USD property in Mexico today, it would cost you approximately $300,000 CAD. If five years ago you had been looking to buy the same $300,000 USD property, it would have cost you a staggering $485,000 CAD. In other words, the same property is now $185,000 CAD (almost 40%) cheaper than it was five years ago!
If you have any questions about the currency exchange rates, or would like to learn more about HiFX fee-free currency exchange services, please e-mail, phone the author +1 (415) 678-2770 or visit his home page
