Save thousands when moving money abroad
The world is smaller than ever. Until 2017, at least, any UK citizen is free to work, study or retire anywhere in the eurozone, and many people travel even further afield.
But as we move around the world, we need to take our money with us. Work in Germany, and you might find you earn a salary in one currency but you pay your mortgage in another. Want to retire in Spain? Great! But you’ll need to find a way to get your pension into a European bank account.
When you’re transferring, say, £200 abroad, settling for an OK rate is not ideal but may be palatable. Sure, you might be able to get a slightly better rate elsewhere, but only to the tune of a couple of pounds. But if you’re buying a property, it’s another story – the difference will run into thousands of pounds.
If you transfer money abroad the way most people do, using your bank, you’ll pay over the odds in two ways. Firstly, banks will usually charge a flat transaction fee of £20 to £30. Many will also hide extra fees by offering you poor exchange rates, which could be worth up to 5% of the money you transfer. If you're buying a property abroad, that can mean you end up paying thousands, if not tens of thousands of pounds, more than you need to.
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Why are bank transfers so pricey?
Banks, and other companies for that matter, will be most competitive in the areas where customers are paying attention – think eye-catching 40-month 0% balance transfers, current accounts offering 3% cashback on utilities or 5% interest when you’ll struggle to get 2% from a normal savings account.
But the currency market is not like this – even with the internet at your fingertips, it’s very hard to compare what you’ll really pay between providers.
“Banks and brokers get away with charging such high fees because there’s a complete lack of transparency in the exchange rate that they use,” explains Taavet Hinrikus, chief executive of money transfer company TransferWise.
“Even when banks say ‘free’ or ‘no commission’, they charge an extra fee by offering the customer a poor exchange rate. The bank may advertise a fee of between £4 and £25, but then you see that you’re missing a whole lot more once the money’s been transferred.”
There is another, simpler, explanation for high bank charges, according to Mark Bodega, director at currency specialist HiFX: “People don’t know they have an alternative to their bank, whether they are changing small or large amounts.”
“I transfer my pension to France”
Denis Watts (above) retired to southern France with his partner to make the most of the weather, lifestyle and space. He transfers his money through peer-to-peer platform TransferWise.
“I moved to France with my wife and two children 17 years ago with a view to retiring here,” he says. “I was brought up in France but spent the majority of my life in Britain, so moving back to France after all this time was a lot to do with getting back in touch with my heritage. The general cost of living is also much lower than in the UK, meaning my pension goes further.
“It took me a while to figure out how to make the most of my pension abroad. I used to use my UK bank to transfer my pension from my British account to a French one. The rates the bank buys the currency at are low, and the rates it charges its customers is high – banks are making an absolute fortune out of it.”
How to cut costs
There are dozens of specialist currency brokers, which effectively give you wholesale exchange rates, making your money go much further when paying large lump sums or regular payments.
Generally, these companies, which include MoneyCorp, HiFX, and Currencies Direct, will have brokers buying and selling currencies in the foreign exchange markets.
TransferWise, operates slightly differently. It tries to match your transaction with someone doing the opposite in another country, charging you both a small fee but bypassing the dealing costs. “We use a peer-to-peer platform, which means, in most cases, money doesn’t cross borders. This cuts out banking charges and reduces costs. We’re also an online business, which allows us to keep our overheads down and pass on the savings to customers. Costs vary between currencies, but we’re usually around eight to 10 times cheaper and five times faster than banks,” says Mr Hinkrus.
So if you want to buy $1,000 and someone in America wants to change the same amount into sterling, your money is swapped at the average wholesale exchange rate for the day and you both pay a small fee. The downside with this approach is you will only be able to access the ‘live’ price, and change your money at the rate that’s going there and then.
If you’re planning to make regular payments, or you don’t need to transfer your money immediately, a full service currency broker might be a better option for you.
Take a mortgage, for example. You wouldn’t sign up to a home loan in the UK where the monthly payment could swing up or down by 18% with no warning. But if you take a mortgage in euros, that’s exactly what you’re doing. In the past two years, the pound’s strongest value against the euro was EUR1.44, but at its low point it was worth 18% less at 1.27. If your mortgage cost EUR1,200 a month, you’d have to find an extra £152 to cover the difference.
A traditional currency broker will speak to you to assess your circumstances, timescales, why you’re moving your money and your appetite for risk to see if a more advanced contract could be more suitable.
These could include:
- Regular payments: These are essentially recurring forward contracts. You can fix a rate for up to two years, and your deposit is typically the payments for the first and final month.
- A market order: These are instructions for the broker to buy your foreign currency if a particular deal becomes available. For example, if the pound is worth $1.38, you could tell your broker to buy $10,000, but only if you can get a rate of $1.40 or better. These don’t need a deposit, but you’ll buy the full amount if the deal is triggered.
Finally, a broker will have a good understanding of the market, and the upcoming events that will influence it. While they don’t have a crystal ball, they can warn you if you’re about to buy a large amount of foreign currency at poor rates by historical standards.
HiFX’s Mr Bodega says: “Timing is just as important as the rate. Say you can afford to wait, perhaps because you’re emigrating to Australia but not until December. If the pound is at three-year low against the Australian dollar, it might make sense to wait. You could have more money arriving in your Aussie account by waiting.
“Ultimately, a broker can help you make better decisions about large transactions.”
There is no universal way of seeing which is the cheapest broker. Different brokers will be cheaper depending on the currency you’re buying, the quantity you’re buying, and to a degree, the best deal available at the time of purchase to the broker.
If you want to shop around, and it’s generally a good idea, you’ll have to get a few quotes.
Top five reasons for transferring money abroad:
- Payments to friends and family
- General living expenses
- Bill payments
- Property purchases
- Overseas relocation or emigration
Source: HIFX May 2016
Timing the market: best and worst rates over the past two years
(Click the table below to enlarge)
Source: Bank of England, May 2014-16
Tips to cut the cost of your holiday money
If you’re buying holiday money, or don’t have a bank account to transfer money to, you probably won’t be able to get as competitive rates as someone transferring substantial amounts, typically £1,000 or more, into a bank account. But you can still cut the cost of foreign currency.
Get a specialist overseas card. One of the cheapest ways to spend abroad is with a travel-friendly debit or credit card. MBNA’s Every Day Plus credit card doesn’t charge a fee to use your card abroad, and it won’t rip you off on the exchange rate either.
You will be charged interest as soon as you withdraw cash, though. For debit cards, Metro Bank is one of the best with no fees or exchange rate surcharges throughout Europe. Outside Europe, each cash withdrawal costs £1, and purchases incur a 1.9% fee.
Keep back-up cash. If you’re travelling through multiple countries, you might want to keep some money in a ‘mainstream’ account to exchange as you need it. The most widely accepted are sterling, US dollars and euros. As someone travelling from the UK, it’s generally best to keep your money in sterling, rather than paying to exchange it into dollars, and then paying to exchange it again.
Plan ahead. Airport bureaux de changes have some of the worst rates going, but people still use them. If you want cash, use TravelMoneyMax.com to find the best exchange rate before you go. Alternatively, pre-paid cards can be a good way to lock in a rate.
You exchange currency when you load the card, and then use the card to pay overseas or to withdraw cash in the local currency. Currency specialist Caxton FX says a typical pre-paid customer buys £1,567 a year worth of currency and, by buying in advance, European-bound travellers get an extra €216 compared to people buying at the airport. Using a pre-paid card could be worth an extra $237.13 if you’re travelling to America.
Finally, make a budget and stick to it.
The difference between two currencies; specifically how much one currency is worth relative to each other. For example, if £1 is worth $1.50, converting sterling to US dollars, the exchange rate is 1.5. Converting dollars to sterling at those levels, the exchange rate is 0.66, so $1 is worth 66p. There are a wide variety of factors that influence the exchange rate, such as a country’s interest rates, inflation, and the state of politics and the economy in that country.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.