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As schools reopen for the new academic year, many parents may find themselves contemplating the financial challenge of funding private school fees.
According to the IFS, from 2022 to 2023, average private school fees were approximately £15,200 in the UK. The difference in private school fees compared to state school spending per pupil has more than doubled since 2010, increasing from 40% to 90%.
Utilising property and assets can offer an avenue of financial support for this purpose.
When it comes to mortgage affordability, school fees can have a negative impact as this is viewed as a financial commitment. However, through our extensive network of lender contacts, we have identified a select group of lenders who can exclude school fee payments from the client’s expenditure calculation, provided the client can evidence sufficient funds in their account or liquid assets in the background to cover the school fees for the entire school career.
This becomes particularly beneficial for clients seeking to refinance and maximise their mortgage affordability in any circumstance when school fees are payable, and when funds are being raised for school fees.
Often, we see clients with large asset portfolios, both liquid and illiquid, who do not want to draw on these portfolios. This could be due to the potential tax implications of doing so, or they do not believe now is a good time to draw down on these investments.
At Private Finance, we strive to provide a holistic advice service, and as part of this objective, we often partner with wealth advisers to seek their guidance whenever necessary. This ensures no stone is left unturned in protecting our client’s wealth.
For clients who possess substantial assets but have limited income, we can look to leverage background investments to generate income by ‘monetising’ these assets. By doing this, a lender could assume a nominal percentage of the asset base could be drawn upon in any given year, to create an additional income stream. This could increase the available borrowing, without the need for the assets to be realised or secured, therefore enabling funds to be raised towards school fees.
Please note, we are not tax advisors and the above does not constitute tax advice. We strongly recommend that you seek tax advice from a relevant professional where required.
Offset mortgages present a versatile solution for various financial scenarios. One prime example of their effective use is in managing school fee payments. Clients often prioritise having adequate funds to cover the entire duration of school fee payments. If a property holds substantial equity, clients can raise funds to cover the entire school career by remortgaging or refinancing an unencumbered asset with an offset account.
Current property value: £1.2 m
Current mortgage: £250k
Situation: The self-employed client needed to raise an additional £300k to fund the school fee payments for their children for the remainder of their education. With a highly variable income, they also wanted to ensure they could always have access to these funds if needed at short notice.
Solution: A total of £550k was raised via a remortgage, with £250k repaying the existing lender and the additional £300k placed in an offset mortgage account that can be accessed at any time. This means that the funds can be drawn on term by term to pay for school fees as needed. Additionally, any surplus savings/income can be added into this account at any time.
The balance of the savings held within the offset account is ‘offset’ against outstanding mortgage debt, with the clients only paying interest on the balance. The facility also allowed the self-employed clients to reserve funds for tax payments for the end of the tax year. This also offset the mortgage costs further.
Using an interest-only mortgage with an interest rate of 5.5% on a £550k mortgage, their monthly mortgage payments would be £2,520.83. However, with £300k held in the offset mortgage account, from day 1 the mortgage payments would only be around £1,145.83 as the interest is only calculated on the outstanding balance. In a year’s time, if £50k is withdrawn from the offset account, the payments would increase to around £1,375. This not only offers the clients flexibility to access the savings in the offset account at any time, but also offset the interest payable on the total mortgage amount.
If the clients have a successful year financially for their business or any surplus income, the mortgage could be fully offset with liquid funds still available if needed.
Please note this is a representative example and does not represent rates of any specific lender or circumstances.
With any type of large financial commitment, it is important to seek the right advice and complete the necessary research before making any decisions.
By speaking with an expert mortgage adviser, they can help you analyse your personal and financial situation in the context of your objectives and goals.
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