The Impact of FX Rates
How currency fluctuations will impact your property purchase: Now, and in the future.
Agreeing the price
So, you have found a property, now it is time to agree a price. The majority of house prices are agreed in Shekels, but how much is that really going to cost you?
If you hold funds in a currency other than Shekels then the actual amount you need to pay in your currency will be different from the time you agree the deal, to the time you get the keys to your new home. This is linked with the movement in the currency markets.
You wouldn’t buy your groceries, agree the price at the checkout and not know the exact amount you have spent on the groceries until you get home.
The reality is that in most circumstances we do not have much of a choice other than to agree a price in Shekels (sometimes you can agree a price in Dollars). So what should you do to work out roughly how much the property is going to cost you?
1. Know what the current exchange rate is.
2. Research what the exchange rates have been in the last few weeks. This way you know what the short term worst/best case scenario will be.
3. Calculate the amount you can afford to spend by multiplying the amount of currency you can spend by the exchange rate.
Just because 1 million shekels will cost you $250,000 today, doesn’t mean that when you get to the point when you need to pay for the property, it will cost the same. It could cost you substantially more or less.
Our client from London agreed to purchase a property off-plan in June 2007. The total cost of the property was 1.5 million Shekels, to be paid in 3 equal installments, August 2007, August 2008 and January 2009. When first thinking about the purchase our clients thought process was ‘the current exchange rate is 8.50 so my property will cost me approximately £176,500’.
Unfortunately too many people think the same way. What happened in reality was he got an exchange rate of 8.8 for the first 500,000 shekels (costing the client less than he thought), a rate of 6.50 for the second payment and a rate of 5.60 for the final payment. In total he paid £223,027 which was £46,527 more than he initially calculated.
Although this is an extreme example, it shows that a property can cost you a lot more than you initially budget. The reverse is also true – you could pay a lot less than you budgeted for.
How currency fluctuations might affect my mortgage payments
If you have a Shekel based mortgage and are earningin another currency, you have a foreign exchange exposure. This means from month to month you don’t know how much you mortgage is going to cost you in the currency you are earning.
From January 2008 to June 2009 the Dollar v Shekel rate has fluctuated between 3.2 and 4.4. On a Shekel mortgage of 4,000 the amount you would have paid each month would have fluctuated between $1,212 and $909!
This can have a big impact on a monthly budget, especially if you have a fixed pension you receive from overseas. One month you may have money spare, other months you may not.
How to protect against currency fluctuations
There are certain financial instruments that can be used to protect against currency fluctuations. These are not offered to the majority of people by the banks, but can be obtained from boutique firms like IsraTransfer.