Your Life in Property - Chapter 9

Finance

The point on what level of finance, or leverage, you choose has been made in Chapter 2 when we looked at what kind of investor you are. Put simply, the higher level of finance you take then the greater number of bricks you can buy for your given cash reserve. There are so many factors to consider when taking finance, as we discussed in the last chapter. Ultimately there will be a trade-off between long-term fixing of the rate and a lower initial pay rate for shorter term money. When looking at what your options are hear, it is good to see what the money markets are pricing different length of fixes at and how this fits in a historical

perspective. One of the tools I use for this is at:

www.swap-rates.com

An example output is above, for current rates for the Euro.

So, what does this all tell us? Well, quite a lot.

First off, the rates shown against the various length of fix shows what banks charge each other for that money. Your access will typically carry a loading to this rate, typically between 1-3% depending on the competitiveness of the money markets. So, from the graph, 10 year Euro fixes are based on an interbank rate of 2.63% as of 24 September 2010. You would expect as a client to achieve a 10 year mortgage payrate of around 3.6%, very cheap on an historical basis. You can check each individual length of fix for this rate and determine what fits for you.

Additionally, you can check how this rate compares with historical trends and see if it is low or high. As we write, money is at the cheapest it has been for centuries, if you can get access to it!

Finally, the curve created by the graph overleaf, often called the yield curve when discussing returns on bonds or gilts, tells a great deal. The steeper the curve, the higher inflation and future rates are being priced into the future. Checking the gradient of this curve over time tells a great deal and informs your choice on length of fix and when to fix very well. There is a great deal of speculation here both in terms of the prices set for longer term fixes and the length of fix that will fit your investment horizon. My advice is to get into these figures to help inform your decision when you strike a finance deal. At the very least, you will be armed with knowledge and information that will help you negotiate with the banks you approach.

Currency Exchange

Getting the best deal on currency exchange can often make up to 2% difference on the amount being transferred. The "spread" that is used (the difference between the spot rate and the rate offered) can be very small with currency dealers in comparison with high-street banks due to the high volume of business that they do. The spread can be as low as 0.3-0.5% as opposed to around 1.5-2.5% with a bank for example.

So for a transfer of 500.000 Euro, a saving of up to 10.000 Euro can sometimes be made, just by spending some time getting the best deal. Additionally, some companies do not make transfer charges which will often save you a considerable amount of money.

Our recommended strategy is as follows:

• Contact your own bank to determine their costs, to gain a "benchmark".
• Apply for a trading account at a number of Currency Exchange Dealers on the day prior to proposed exchange (free).
• On day of exchange, ask for the 'spot rate' from various dealers and attempt to get the best deal. If you are quoted say 1.20 Eur/£ early in the day then perhaps ask then to book a rate when it hits a higher level, say 1.21 Eur/£.
• Book and pay for your rate by the close of play.

Additionally, for future exchanges, you can take advantage of 'booking' a rate for some time in the future and making the payment downstream. This would work if you suspect you need the cash in Germany in say 3 months and want to take advantage of what you perceive to be a good rate. This costs nothing and you generally need only lodge a 10% deposit.

You will find lots of companies on the internet with whom you can set up an account. Here are a few suggested ones that clients have used in the past with favourable outcomes:

• World First - 02078019080
• Currencies Direct – 08453893000 (get them to call you back as its an 0845 no)