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We have two children at a private school and we are worried we won’t be able to afford it if Labor imposes VAT on fees.
Our oldest son will be a junior in high school in September and we don’t think it’s fair to keep him away from his school and friends.
Our youngest daughter is in first year, she has had emotional and behavioral problems and we feel that a change of school would be a disaster for her.
We both work full time and almost manage to pay school fees of £36,000 a year, having cut back on family spending and holidays as much as possible. An extra 20 percent would be the final straw.
Too much: Our reader says an extra 20% on current school fees if Labor imposes VAT on private schools would be too much to bear.
We also have to remortgage this year and our £300,000 mortgage with 15 years to go will go from a five-year fixed rate of 1.5 per cent to around 4.5 per cent, increasing our monthly mortgage bill by about £800.
Is it possible that we can find a solution that involves both covering school expenses and fixing the mortgage?
Our house is worth around £900,000, so we have a lot of equity. Could we fix our mortgage while the children are still at school and borrow an extra £150,000 to help cover the fees?
I thought maybe putting the extra money in an interest-bearing savings account and taking it only when we needed it might work.
This is Money’s Ed Magnus responds: It is no secret that the Labor Party is planning a VAT raid on private school fees if the party comes to power.
Currently, independent schools can register as charities in return for acts that benefit the local community, such as sharing their facilities with state schools.
The Labor Party has pledged to remove the charitable status of independent schools, which would have a significant impact on their fiscal position.
This would result in private school fees being hit with 20 per cent VAT and the relief schools receive on business rates being removed, among other benefits.
Critics have argued that while the wealthiest parents will be relatively unaffected, many others who are already struggling may struggle to find ways to raise additional funds, and some could face the prospect of having to withdraw their children from the current school to transfer them to another. the state sector.
Our reader says that an additional 20 percent on top of the rates they currently pay would be too much for them. However, since their children are already in high school and the younger ones need extra care and attention, like many parents, they don’t want to simply pull them out and find them an alternative public school.
They hope their solution will be to raise the necessary funds from the equity in their home through a remortgage, locking it in for the remainder of their children’s education.
However, since mortgage rates have increased substantially, this will be expensive.
This is Money’s true cost mortgage calculator shows that moving from a £300,000 mortgage at 1.5 per cent with 15 years remaining to a loan of the same size at 4.5 per cent over the same term would increase payments monthly from £1,862 to £2,295.
Adding an extra £150,000 to the mortgage takes the monthly payments to £3,442 – an extra £1,148 a month or £13,776 a year.
This is £6,576 more than 20 per cent VAT on £36,000 of annual school fees, which equates to £7,200 a year.
Some of that extra cost could be recovered by putting the extra loan into a savings account and only using it as needed, but this savings interest will be taxed outside of a cash Isa.
However, this issue seems to have more to do with finding extra money for VAT on fees than the most cost-effective option. But is that additional debt even possible? How much could it cost and what could the risks be?
For expert advice, we spoke to Luke Thorneassociate director of the mortgage brokerage SPF Private Clients and Chris Sykestechnical director of the mortgage brokerage Private Finance.
Could they borrow against their house to cover school fees?
Chris Sykes responds: The short answer to the question is “possibly yes.”
As long as a lender can classify the new larger mortgage as affordable given your income and expenses, this is possibly something that can be done.
Expert: Chris Sykes, technical director at mortgage broker Private Finance
As for locking in while your children are in school, you can get fixed rates for longer than the standard two or five year period, so this should be possible too.
Luke Thorne responds: As you approach the end of your fixed rate, it’s a good opportunity to renegotiate a deal without paying prepayment fees, switch to another fixed rate mortgage for security, and raise cash to cover school fees.
You will need to consider the jump in monthly payments – you are going from a rate of 1.5 per cent to around 4.5 per cent, so it will already be an increase of around £800 a month, plus interest costs to borrow another £150,000 over the life of the mortgage.
Ultimately, you have a lot of equity in your home, so, subject to affordability checks, you should be able to borrow the money you need for school fees.
This will mean higher mortgage payments and paying more interest over time, but you may feel it’s worth it to keep your children in private schools.
> Best mortgage rate calculator: How much would a new deal cost you?
Can they keep the monthly payments low?
Chris Sykes responds: One thing you can do to keep your monthly payments low would be to stretch out the term of your mortgage or put some on interest only.
There may be ways to reduce monthly payments by extending the term of your mortgage from the current 15 years until retirement age.
Switching to an interest-only mortgage can also reduce your monthly payments, but then you need to have a plan for how you will eventually pay off the mortgage at the end of the mortgage term.
Should extra school expenses be borrowed from a savings account?
Luke Thorne responds: If you raise £150,000 you will have a significant amount of cash compared to the size of your mortgage, which you won’t need to use all at once, so it may be worth considering an offset mortgage.
The alternative would be to put it in a savings account – and the good news is that these pay higher interest rates these days – but you would be taxed on the interest and, if you are a higher interest rate taxpayer, that could be significant.
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Expert: Luke Thorne, associate director at mortgage broker SPF Private Clients
With an offset, you will only be charged interest when you withdraw money to pay fees.
This could work well, as you’re freeing up a lot of capital, but you’ll be paying the fees over several years, rather than all in one lump sum.
You won’t be charged taxes on the interest either, as you won’t actually earn any, it will just reduce the interest you pay on your mortgage.
Offsets may have slightly higher rates than standard residential offers, but by speaking to a broker across the market you will be able to find the best option.
Another thing to consider is that lenders may calculate your affordability differently when it comes to school tuition.
If you pay £3,000 a month, some may put it on their calculator and take it into account when working out how much you can afford to borrow.
With other lenders, if you can show that you have set aside the money to pay school fees, that won’t affect affordability.
Have you helped clients with school fees in the past?
Chris Sykes responds: Quite often we are asked if we can raise capital for a client to cover school fees; A recent example I had is probably similar to what would really suit you.
A client approached me recently because he felt his school fees were too high to pay monthly from his income.
They always wanted to educate their children privately and did not want to have to stop doing so.
The school fees for the children’s entire education amounted to £350,000 and he, like you, had significant equity in his property.
The tricky thing about these cases is that lenders will often still factor in the monthly liability for school fees, which will work against you when it comes to affordability.
However, if you borrow the fees in full over the life of the mortgage, some lenders will ignore the fees in their affordability calculations.
With my client, which is relevant to you, we arranged an offset mortgage so that school fee money could be withdrawn instantly at any time, but no interest would be paid on any money not withdrawn.
This made more sense for my other client because saving at the mortgage interest rate is more beneficial than earning interest on the money, which is taxable.
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