Property abroad or a deposit in your home currency

Savers in Poland, Czechia and other EU countries outside the euro area usually earn and spend in one currency. A deposit in that currency is simple: the number is fixed and the purchasing power at home is what inflation leaves of it. A property abroad adds a second currency to the picture. Whether that helps or hurts depends on where the exchange rate goes, which nobody can predict. This article explains the mechanics, the risk in both directions and a hypothetical example. It is not a forecast.

Two currencies, two questions

Every cross-border property decision contains two separate bets. One is on the property itself, its price and rent. The other is on the exchange rate between the currency you earn and spend in and the currency the property is priced in. A good property can lose money for you if the currency falls against yours, and a mediocre property can look good if the currency rises. Keep the two questions apart.

Where the deposit currency matters

• A zloty or koruna deposit protects you against exchange-rate moves if all your future spending is in that currency. It does not protect you from domestic inflation.
• A euro deposit held by someone who spends in zloty is already a currency position. If the zloty strengthens, the euro balance buys less at home.
• A deposit in the currency of your future costs is a form of hedge. For example, if you plan to pay a purchase price in euro, euro savings remove the exchange-rate step. Our article on currency and payment for overseas buyers explains the mechanics of paying, and the guide to multi-currency accounts and exchange rates for property payments covers the practical side of holding and converting.

Risk in both directions

Currency risk is not only a risk of loss. It is a risk of difference.

• If your home currency weakens against the property currency, the property is worth more in home currency terms, and the rent you receive converts into more of it. This works in your favour, like an unplanned gain.
• If your home currency strengthens, the same property is worth less when converted back, and the rent is worth less too. This works against you even if the price in the local currency is unchanged.
• If the property is in a currency that is volatile or that loses value against your own over time, the local yield can look high and the real return in your currency can be low or negative. Our article on Turkey is a clear case: nominal growth in lira, a loss after inflation.

Two features make the risk bigger than it looks. The exchange rate matters twice, once when you buy and once when you sell. And both the purchase price and the exit are lump sums, so a small percentage change is a large amount.

Rent in the local currency

Rent is usually paid in the currency of the country where the property is. That has two sides. It is a natural match for the local costs of the property, such as service charges, local taxes, repairs and management, which are also in that currency. So part of the exchange-rate risk cancels out inside the property. The surplus that you bring home is converted at whatever rate applies, and a bank or card converting it adds a spread. In some markets, rents are quoted in a stronger foreign currency such as the dollar or euro, but are paid locally in a weaker one, which adds yet another layer. Check how the lease is written.

A hypothetical example from Poland

This is an illustration with round numbers, not a forecast or market data. A Polish resident has PLN 425,000. Assume EUR/PLN is 4.25. The money buys a property worth EUR 100,000, ignoring costs. Assume the property earns a net rent of EUR 4,000 a year, and the euro price stays at EUR 100,000.

• If EUR/PLN stays at 4.25, the property is worth PLN 425,000 and the rent is PLN 17,000.
• If the zloty strengthens and EUR/PLN falls to 4.00, the property is worth PLN 400,000 (about 5.9% less) and the rent is PLN 16,000. Nothing changed in euro, yet the owner is PLN 25,000 down in zloty terms.
• If the zloty weakens and EUR/PLN rises to 4.50, the property is worth PLN 450,000 (about 5.9% more) and the rent is PLN 18,000.

The same PLN 425,000 in a zloty deposit stays PLN 425,000 plus interest in all three cases. If the owner will spend the money in zloty, the deposit has no exchange-rate swing. If the owner expects to retire in the euro area and spend in euro, it is the zloty deposit that carries the currency swing. The swing is a feature of where you will spend, not of the asset.

A move of 6% can also be larger or smaller than a year's rent. In this example the yield is 4%, so a 6% currency move can erase more than a year of income. Real exchange rates have moved by more than that in some years and by less in others. Past movements say little about the next ones.

Hedging at a high level

• Match currencies. If the property earns and costs euro, holding some savings in euro for reserves and repairs reduces conversions.
• Borrow in the currency of the income. A mortgage in the same currency as the rent reduces the mismatch, but a loan in a foreign currency taken by someone who earns in zloty adds a risk of its own. See mortgages for non-residents.
• Convert in steps rather than all at once, which spreads the timing risk but does not remove it.
• Financial hedges such as forward contracts exist, but for retail investors they are costly, short-dated compared with a property holding period and not available for every currency. We do not recommend any instrument. Talk to a bank or independent adviser.
• Accept the risk consciously and size it. Do not put more of your savings into one foreign asset than you can afford to see 10% to 20% lower in your own currency.

What diversification really means

Holding assets in more than one currency lowers the dependence on a single economy and a single central bank. For someone whose income, pension and savings are all in zloty, a property in euro is a diversifier. For someone who already has large euro savings and spends in euro, a euro property adds nothing on currency and only concentrates risk in one asset. Also compare the broader picture in rental yield by country, because the yield you are offered often reflects the market's view of its own currency. You can run your own numbers in the calculators.

When a deposit in your home currency is the better choice

A home-currency deposit is the better choice if the money will be needed within a few years and in home currency, if you cannot tolerate a currency swing, if the foreign yield is high only because the currency is weak, or if costs of exchange in and out would eat much of the benefit. It also suits an emergency reserve, which should not depend on a rate on a given day.

FAQ

Does buying property abroad protect me from a weak zloty? Partly. If the zloty weakens against the property currency, the property gains in zloty terms. If the zloty strengthens, you lose in zloty terms. It is a diversifier, not a guarantee.

Is a euro deposit in Poland a hedge? It is a hedge if your future costs are in euro. If your spending is in zloty, it is a currency position that gains when the zloty falls and loses when it rises.

Should I hedge with a forward contract? Forwards exist but are rarely practical for private buyers of a long-term holding. Ask your bank or an independent adviser about cost and terms.

How we help

We are a trilingual platform that finds properties and coordinates independent local lawyers and tax advisers. This text is informational and is not investment, legal or tax advice, and the numbers are hypothetical. Past performance does not guarantee future results. Verify exchange-rate conditions and rules with your bank and adviser before you commit.