The potential surge in private school fees under a Labour government is a significant concern for many parents. The financial impact could be substantial if Labour secures a majority in Westminster in the upcoming election and applies a 20% VAT to currently exempt private school fees.

Consequently, many parents with children in private schools are looking for innovative ways to plan around this potential increase. One popular consideration is whether they can pay school fees in advance, thus avoiding these potential future VAT charges. Many parents may turn to capital raising using mortgages for this purpose should they be able to go down this route. However, it is uncertain whether this will be allowed, and the risks and uncertainties associated with future developments in laws and regulations.

Please be aware, Private Finance is not a tax adviser and the contents within this article do not constitute tax advice. We strongly recommend that you seek tax advice from a relevant professional where required. Should you wish to be introduced to a specialist in this area, please let us know.

Preparing for uncertainty and gaining financial flexibility

Without a crystal ball to predict the future, it is important to plan amid various uncertainties. In this article, we discuss how rising school fees could impact mortgage affordability and how you could use different mortgage products, assets, and investments to maintain financial flexibility in the uncertain market ahead of the election.

Article highlights:

  • Mortgage affordability: Understand how school fees impact your mortgage calculations and explore lenders who offer favourable terms by excluding school fees from expenditure assessments.
  • Using assets and investments: Use properties and other assets to bolster financial support. Monetise your asset portfolios to generate additional income streams without liquidating investments, maintaining financial stability.
  • Offset mortgages: Consider mortgage solutions, such as offset mortgages, that offer cash flow flexibility and allow you to manage school fees effectively while minimising interest payments.

Our mortgage consultants can help you assess your personal and financial situation and explore your options during these financially uncertain times in the context of private school fees.

Speak with a mortgage broker now, or request a call back.

How do rising school fees impact mortgage affordability?

School fees can have a negative impact on mortgage affordability as this is viewed as a financial commitment. An increase in the cost of these payments could negatively impact mortgage affordability when applying with a lender, potentially limiting the amount that you could borrow.

This highlights the importance of identifying the right lender who might be able to exclude school fee payments from the client’s expenditure calculation. Fortunately, we have identified a select group of such lenders and developed relationships with them to potentially offer this solution to our clients. These lenders typically require clients to demonstrate sufficient funds in their account or liquid assets to cover the school fees for the entire duration of their schooling if necessary.

This becomes particularly beneficial for clients seeking to refinance and maximise their mortgage affordability in any circumstances when school fees are payable, and when funds are being raised for school fees.

Using investments to generate additional borrowing without liquidation

It could be rational to choose to avoid drawing on large asset portfolios, both liquid and illiquid, either due to the potential tax implications, or because it may not be a good time to draw down on these investments.

However, in the eyes of lenders, it might be possible to generate additional income by “monetising” these assets if you possess substantial assets but have limited income, without needing to realise or secure them. Lenders can 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, thereby potentially enabling funds to be raised towards school fees where debt may not have been a considered option.

Please reach out if you feel this is relevant to you, and would like to discuss this option further.

Using an offset mortgage to help pay for private school fees

Amid financial uncertainty, offset mortgages could be invaluable in offering financial flexibility and absorbing the shock of uncertain future financial demands. One prime example is managing school fee payments, allowing parents to maintain cash flow flexibility and cover potentially rising education costs.

If you have substantial equity in your property, you may be able to capital raise and place these funds into an offset account. Remortgaging or refinancing an unencumbered asset allows you to place these funds into an offset account, enabling you to maintain financial flexibility and cover the entire period of school fees.

Offset mortgages have many financial benefits. You only pay interest on the money you withdraw, and if you over-borrow, you can ensure you have accurate provisions to cover any outcome, for example, for rising school fees. Offset mortgages could provide invaluable financial flexibility for parents facing uncertain financial demand if they have substantial equity within their home.

If you would like to discuss any of these financial solutions further and seek personal advice, please feel free to reach out to our team on 0800 980 8777 or email info@privatefinance.co.uk.

VAT = Value Added Tax

Your home may be repossessed if you do not keep up repayments on your mortgage

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