If you are changing a large sum of money into another currency and need a currency exchange broker or bank to transfer the money for you, the currency exchange margin will be important to you – so what is it?
If you are perhaps buying a house overseas, making regular payments overseas or even emigrating or simply needing to exchange a large sum money into another currency, invariably you will turn to a currency exchange broker or your bank to help you with the transaction.
These financial institutions will operate on a currency exchange margin rate, this is the margin they use to make their money rather than charge you a commission fee as you would perhaps get if, for example, you were changing holiday money at a bureau de change.
So what is a margin rate?
Firstly foreign exchange rates are used to indicate the relative value between two currencies e.g. How many Euros you can get for a Pound.
These rates are defined by what is known as the Interbank market, a market made up of large institutions such as big banks, exchanging large volumes of currency.
When a bank or currency exchange broker then quotes an exchange rate to you as a customer, they will take the interbank rate and will add an amount, which is called the margin rate.
To explain, if the interbank rate for converting Pounds to Euros is 1.18, the exchange rate quoted to you by a bank or broker may be 1.16 Euros to the Pound. This means the margin rate you have been charged is 0.02 Euros for every pound you exchange.
It is clear that the larger the sum of money you are exchanging, the greater the impact the margin rate can have on your costs.
How does the margin rate vary between banks and currency exchange brokers?
Specialist currency exchange brokers, such as TorFX invariably can offer the best currency exchange rates i.e. they have a smaller margin.
This is because they generally just focus on the foreign exchange services and carry lower overheads than banks.
Do brokers actually offer a better fx deal?
Lets look at an example. At the time of writing, 7 May 2017, the Interbank exchange rate for the Pound to Euros was around 1.18006
Indicative exchange rate offered by a bank and a broker were
- NatWest – 1.1600 – a margin rate of around 0.02
- TorFX – 1.1800 – margin rate of around 0.00006
This supports the view that the broker exchange rate is considerably better than that offered by the bank.
To take this a stage further and see exactly what this means to the amount received for £5,000, from
- NatWest – 5800 EUR
- TorFX – 5900 EUR
A difference of 100 EUR!
You can easily see the impact that the margin rate has on the amount of money you receive for your currency exchange.
Clearly the impact will be felt more the greater the amount of money you need to exchange or the more frequently you need to exchange money.