Don't Let The Banks Profit From Your Foreign Currency Transfers

As an expat, the losses you incur from foreign currency (FX) transactions can often be unnoticed. In fact, many people don't consider these losses as an expense because they are not visible unless you physically compare the rates you receive against the open market rates.

Understanding Foreign Currency Exchange

Each country operates in a particular "base" currency, used for daily transactions and asset valuation. Currency values fluctuate daily, driven by factors such as supply, demand, and other economic indicators.

In simple terms, one unit of currency in one country holds a different value in another country. For example, as of today (3rd September 2024), £100 is equal to $132 at a spot rate of circa 1.32 on the current foreign exchange market. In June 2022, the rate was 1.22, indicating an 8% increase over two years.

For most people, these fluctuations don't often impact daily life. A UK resident earns and spends in GBP, while a US resident does so in USD. However, for those working with cross-border finances, FX rates are crucial. Understanding and managing these rates can prevent significant losses, which often benefit the banks instead.

Examples of FX Impact

Example 1: Small Scale - Vacation Spending

Imagine my parents visiting Dubai from the UK for a two-week vacation. They prefer to have their spending money ready before traveling. Let's say they plan to spend £1,500. They go to the local post office and receive AED 6,700, an effective rate of 4.46. Checking the market spot rate, which is 4.85, they should receive just under AED 7,250—a difference of AED 575 (£119).

While this may seem small, it highlights how much you can lose by not getting the best rate. Here are some tips to avoid such losses:

• Use a credit card abroad: Many credit cards offer good FX rates, fraud protection, and no additional charges.
• Ask a friend or relative: If someone you know lives in the destination country, consider swapping currencies at the market rate. For example I would be happy to swap AED with their GBP, as I actually have some GBP expenditure to cover – so we both benefit.

Example 2: Large Scale - Business Operations

I recently helped a company, with offices in both the UAE and UK, with some financial planning. Their UAE office generates revenue in AED, SAR, or USD, while the UK office incurs expenses in GBP, costing around £50,000 monthly. Previously the UAE office used its local bank to transfer funds, leaving the bank to set the FX rate.

In November 2023, the bank's rate was 4.98, whereas the market rate was 4.66. This difference cost the company AED 16,310, equating to £3,500 and was happening every single month. By following my advice to switch this process to involve an FX transfer specialist, they achieved rates within 1-2% of the market rate, saving AED 13,000 monthly, or £33,500 annually.

Example 3: Property Purchase

A British expatriate living in Saudi Arabia has saved up a considerable sum from their employment in the region, where they earn and save in Saudi Riyal (SAR). They decided to deploy some of these savings into a property investment in UK, which will earn them an annual rental yield and achieve growth with the property market.

The property is worth £750,000, of which 50% is being mortgaged. Stamp Duty Land Tax will be due on this property at a rate of 8.33%, as this individual is a non-UK resident and also owns other properties already in the UK.

This means a transfer from Saudi Arabia to the UK is required totalling £437,500.

The money will be coming from savings accumulated in SAR, where the current market spot rate is 4.95, which would equal SAR 2.16m.

If using either the local Saudi bank or local UK bank to facilitate this transfer, the bank would typically take 5-7% from the market FX rate, meaning the actual SAR required would be SAR 2.3m.

This is a huge saving of SAR 130,000 or £27,000, which could be kept in savings or otherwise used to reduce the mortgage element of the property purchase, saving interest expense.

Simple forward planning and running these matters through a financial professional for review, would save significant amounts that would otherwise go into the hands of the banks .

Key Takeaways

When dealing with foreign currency, it's crucial to:

• Plan ahead to use the most cost-effective solution.
• Avoid relying on usual bank transfers for FX transactions.
• Consult with a finance professional knowledgeable about FX markets for significant transfers.

By understanding and managing FX rates, you can save money and avoid unnecessary losses, ensuring that the banks don’t profit from your transactions.

As with the examples above, transactions of this nature often come with other financial niche areas that require careful consideration. The cases above includes areas such as transfer pricing, stamp duty, property investment and international mortgages.

At Skybound Wealth Management, we are well versed in many of the complex areas of finance. With a range of qualified professionals within the team available to guide individuals to ensure the best financial decisions are made.

If you would like to arrange a complimentary consultation on any matters you may be uncertain in, please feel free to get in touch.