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 1.13, the exchange rate quoted to you by a bank or broker may be 1.11 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, the Interbank exchange rate for the Pound to Euros was around 1.16902
Indicative exchange rate offered by a bank and a broker were
- NatWest – 1.1214 – a margin rate of around 0.047
- TorFX – 1.169 – margin rate of around 0.002
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 – 5607 EUR
- TorFX – 5845 EUR
A difference of 238 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.
This article has been updated on 19 September 2016
We have updated this article with the latest exchange and margin rates to reflect the position after the Brexit vote to leave the EU.
This article was originally published in May 2011 and it is interesting to note these facts :
- The pound is stronger now against the Euro than it was in May 2011 (Current rate : 1.16902 vs 1.1387 in May 2011)
- There is now a bigger difference between the margin rates between TorFx and Natwest compared to May 2011 (238 Euro difference compare to 112.5 Euros in May 2011).
It makes even more sense to shop around for the best deals when exchanging large amounts of currencies. Don’t just go to your high street bank, but seriously consider the deals that brokers such as TorFX can offer.