Getting the Sums Right - School fees and mortgages
Posted on 13 October 2014 by
For many of my clients their largest monthly outgoing is not their mortgage, unsecured debts or even spending money; it is their children’s school fees. Even a modest private school can be upwards of £600 a month, and if they have two or three children it can be a real strain. In the past, there were some banks and building societies who ignored this large monthly outgoing when calculating mortgage affordability as the view was that children could always be taken out of private school if this became an issue. However, since the Mortgage Market Review in April 2014, this is no longer the case and a commitment to school fees will always now be included as a fixed monthly outgoing in lender’s affordability calculations. (Unless you can provide proof that the children are leaving that school). This situation, combined with the requirement for lenders to ‘stress test’ to make sure you can still afford a mortgage if rates go up, mean that many clients are finding getting the mortgage that they need is out of their reach. However, there is one option available which has proved suitable for a number of clients. I am working with a number of clients that are increasing their mortgage to borrow the extra cash needed to pay for school fees in their entirety. This could prove beneficial for some clients; especially as some schools will allow a reduction in their costs if all the fees are paid upfront.
For example, let’s assume that school fees for one of my client’s children is £20,000 per year for five years, so £100,000 in total. If that were to be paid monthly over those five years then my client would be paying £1,666 per month (plus all the other background costs, e.g. school trips, uniform, meals, etc). If that same client borrowed that money on their mortgage over 20 years on repayment to pay for their child’s education costs in full, at a typical mortgage rate of 3.5%*, then the extra £100,000 would cost £579 per month. This could help make fees more manageable for some families in the short term – although please remember that as you pay the money back over a longer period, although the monthly repayments are lower, you will end up paying more back than you originally borrowed, due to interest.
Sometimes paying five years of school fees up front isn’t ideal (perhaps there’s the possibility your child might change school for example), but it’s still possible to utilise this solution if you’re paying the fees on a monthly basis. Often the client takes out an offset mortgage to help reduce their monthly payments; they would put the money that they had borrowed for the fees into a savings account linked to the mortgage, and the bank would then reduce their monthly payments in relation to the balance of their savings – effectively meaning that my clients would only pay interest on the school fees as funds are drawn down.
Clearly this is not for everyone as it depends on the equity you have in your property and your personal circumstances; , and you would end up paying back the school fees over a twenty year period as opposed to a five year term; its worth bearing in mind that extending the debt over a longer term means you will end up paying far more than the original borrowings. However if this is something that you would like to discuss, feel free to contact myself or one of my expert colleagues and we can decide whether this is the right thing for you to do.
*This figure is for guidance purposes only and the actual rate applied will be dependent upon a number of factors, such as product type, special rates, term etc…
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.