Friday, November 28, 2014

Global Impact: Transferring Large Amounts of Foreign Currency Does Matter

According to the UK-based The Telegraph, many people are shocked by the high cost of buying foreign currency and sending it abroad.

With 150,000 Britons moving abroad for work or to retire every year and many more already settled outside the UK, finding the cheapest and fastest way to send money abroad can create a bit of a minefield. 

Nearly nine out of 10 people automatically approach their bank first. High-street banks generally charge £10-£40 (US$15.76 and US$63.06, respectively) for each transfer and although there is usually no commission, there's a hidden cost in the exchange rate. That is because banks offer customers a different rate depending on whether they're buying or selling a currency.

The spread or margin can be as much as 5% which makes a huge difference if you are sending a large amount, for instance to buy a home or a yacht. On a major £250,000 purchase you would be losing out by £12,500 (US$29,709.10).

The biggest challengers to banks are foreign exchange currency specialists. There are more than a thousand brokers in the UK. Some of the longest standing firms are Moneycorp, HiFX, Smart Currency Exchange and World First.

Daniel Abrahams of the comparison site said: "Without question, the simplest and most cost-effective way to make a transfer is to opt for a non-bank foreign-exchange specialist." Their main advantage over banks is that they are cheaper and faster. 

Fees are low, particularly for online transfers, starting at around £4 per transaction. For larger amounts fees are often waived--HiFX and Smart Currency Exchange, for example, have no charge when sending £3,000 (US$4,730.19) or more abroad and World First's service is free for customers in the UK and mainland Europe. 

The exchange rates on offer are another draw and are typically two to four per cent better than you will get at your bank.

Transferring money to a bank abroad is also quicker. Banks' standard service takes anything up to five working days. With major currencies such as the US dollar or the euro, a money order placed in the morning will usually arrive the same day. More exotic currencies will take two working days or longer.

World First claims the record for the fastest transfer when it sent money to a bank in Germany in seven minutes last year.

COMMENT: When you open an account with a broker you will have access to a dedicated specialist who can give you expert guidance on the currency markets. You can discuss your needs and the various services available. If you want to send funds almost immediately you will have to use the rate available on the day, known as the "spot" rate. But if you plan ahead you can use one of the other methods available through your broker.

The exchange rate on various currencies is constantly changing. There can be wild variations. For instance, in mid-July the pound soared close to $1.72 against the US dollar, now it has sunk to $1.61.

One way to deal with these swings is to take out a forward contract. This allows you to lock into a favorable rate. Rather like a fixed-rate mortgage, it guards against rates moving against you though you will lose out if rates improve.

You have to pay a deposit of usually 10%, so to fix the rate on £100,000 you would have to pay £10,000 when you take it out. Most contracts last a year, though Moneycorp allows you to lock into the rate for up to 24 months. You decide on the date you will want the funds when you take it out and pay the balance then.

Mark Bodega of HiFX said: "Forward contracts are ideal when buying an overseas property as a sudden swing in the exchange rate could put buying your dream home at risk. You wouldn't agree to buy a house in the UK if the price could suddenly jump up by five per cent. Yet that could easily happen if the currency market moves against you between the time you agree to buy it and when you have to pay for it, which could easily be a couple of months later."

Another option if you have to pay regular bills or need to have your UK pension transferred to you overseas is a regular payment plan. This plan also allows you to fix the rate. You can choose to receive a set amount in the foreign currency or to send the same amount in pounds each time at the rate you have fixed.

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