If you’ve got a large currency transfer coming up, but the payment isn’t due for weeks or months, you’ve probably heard the term forward contract. It’s one of the most useful tools available to people buying property abroad, and it’s simpler than it sounds. Here’s what you need to know.
A lot can change between offer and completion
When you have an offer accepted on a property abroad, you rarely transfer the full amount that same day. There’s often a gap of weeks or months before completion. In that time, exchange rates can move significantly.
So what does that look like in real life? Say you’re buying a property in France for €300,000. If the rate moves 2% against you between agreeing the purchase and sending the money, that’s an extra £5,000–£5,500 you hadn’t budgeted for.*
A forward contract lets you lock in today’s exchange rate, so you know exactly what rate you’ll pay, regardless of what the market does before completion.
*Exchange rate movements and their impact on your transfer will vary based on market conditions and the amount being transferred. This example is for illustrative purposes only.
So, what actually is a forward contract?
It’s an agreement to exchange your currency at a rate agreed today, for a transfer that happens at a set point in the future. You’re not transferring the money now, but the rate is fixed, so you have certainty over your costs from the moment you book it.
To secure the contract, a deposit is required upfront, with the remainder paid at the agreed transfer date.
It’s a good option when:
- Your payment is due weeks or months from now, and you want to know your costs today
- You’re happy with the current rate and want to protect your budget if the market moves against you
Forward contracts may not be suitable for everyone. They are typically used by customers who have a known future payment and want to reduce exposure to exchange rate movements.
What if you need to transfer money now?
Forward contracts are designed for future payments. If you need to move money quickly, a spot contract may be the better fit. It lets you exchange at today’s rate and transfer the funds fast.
When a forward contract might not be right for you
Locking in a rate gives you certainty, but it also means you won’t benefit if the market moves in your favour after you’ve booked. If the rate improves, you’re still committed to the rate you agreed.
It’s also worth knowing that forward contracts are legally binding. Because you’re agreeing to a future transfer, you’re committing to completing that transaction. If your purchase falls through or your timeline changes significantly, there may be implications.
Your Lumon account manager will walk you through your options so you can decide what works for your situation.
How you can book a forward contract with Lumon
Get in touch with our team and your dedicated account manager will walk you through your options. They’ll help you decide whether a forward contract makes sense for your situation, and handle everything from there.
This publication is provided for general information purposes only and does not constitute financial, legal, tax or other professional advice from Lumon, nor is it intended as a substitute for obtaining advice from appropriately qualified professional advisers. Foreign exchange services provided by Lumon are offered on an execution-only basis. Lumon makes no representations, warranties or guarantees, whether express or implied, as to the accuracy, completeness or timeliness of the content of this publication. Foreign exchange transactions involve risk. Currency movements and market volatility may affect costs, cash flow and financial outcomes. Lumon Pay Ltd, trading as Lumon, is authorised by the Financial Conduct Authority as an Electronic Money Institution (FRN: 902022). Lumon FX Europe Limited, trading as Lumon, is regulated by the Central Bank of Ireland (Reg No: 631617).
