Weak pound to cost eurozone holidaymakers and home buyers
Bad news for people planning a European break or thinking about buying a holiday home in the eurozone this year. The credit crunch has started to take a serious bite out of the currency market, with the pound falling to a record low of 80p against the euro on 8 April.
Although the Bank of England’s decision to cut interest rates by 0.25% instead of half a percentage point has helped the pound rally against the euro, if you venture abroad this spring or summer you may well find your money won’t go as far as it has done in the past.
The pound has been falling against the euro for the last eight months as a result of the credit crunch in the US. No wonder that people thinking about buying in the eurozone are getting the jitters, while holidaymakers are preparing themselves for an expensive time.
But there are ways to reduce the pain of a weak pound.
If you are planning to travel to the eurozone this year then there isn’t a lot you can do to soften the blow. However, it may be worth considering buying your currency now thus negating the risk of the pound weakening further.
Unless you’ve got access to a crystal ball, it is impossible to know how Stirling will perform moving forward.
Some experts believe the pound is unlikely to fall much further and will instead recover slightly in the near-term. However, if predictions of further interest rates cuts come to pass, then the pound will probably fall.
Nick Fullerton, managing director of FC Exchange, said: “No one knows where Stirling will go – but to avoid any risk it is worth considering buying currency now. This gives you the security of today’s exchange rate.”
If you do decide to purchase your holiday money in advance, then make sure you make the most of your time and shop around for a good deal. Take a look at the exchange rates and commission charges offered – many bureau de change advertise commission-free currency but recoup this loss by taking a greater margin on the exchange rate. The most consistently competitive rates are available from the Post Office, Marks & Spencer and Travelex.
The weakened pound plus fears of a housing market slowdown across Europe may have put many people off buying a home abroad.
But according to Fullerton, the falling pound represents an opportunity for buyers: “European homeowners are struggling to sell – partly because the strong euro means their houses are 10% more expensive for Stirling buyers, but also because there are fewer buyers around.
“Some investors are taking the initiative and haggling with sellers to get a good deal. If you can negotiate down the price then this could offset the increased cost of buying in euros.”
Mark Bodega, director at foreign exchange specialist HiFX, agrees that a drop in demand for European property means vendors are feeling the pinch and may be willing to negotiate on price.
And if the seller is British, then Bodega says buyers are in an even stronger position to haggle: “If you are buying a European property from a Brit, use the exchange rate fluctuations to renegotiate the price of the property.”
If you do decide to plough on and buy abroad, then both Bodega and Fullerton recommend taking out a forward contract – this allows you to fix the rate of exchange for up to two years.
Bodega said: “A forward contract means you can lock the price now and pay later. This is a good idea if you are on a budget and want to security of knowing exactly how much the house will cost you rather than leaving it to chance and finding exchange rate fluctuations leave you paying more.”
Of course, if you do fix the exchange rate now then you will lose out should the pound increase in value against the euro. And you will need to pay 10% of your currency purchase upfront as a deposit.
But Bodega added: “Some people would rather gamble on a stronger pound and wait to see what happens – but it’s worth remembering that the exchange rate could get worse, especially as the euro is expected to stay high for the rest of the year.”
If you are reluctant about fixing your exchange rate now and potentially missing out down the line, then the question to ask yourself is how important is your budget. If the answer is very, and you cannot afford to exceed it, then fixing is the best way of ensuring you don’t have to fork out more for your overseas property.
But if you have a bit of leeway with your budget and are prepared to risk paying more, then holding out could be worth it. Just make sure you keep monitoring the exchange rates to find the best time to buy your currency.
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.