Can we add £150k to our mortgage to cover Labour's VAT on school fees? (2024)

We have two children in private school and are worried that we won’t be able to afford it if Labour imposes VAT on fees.

Our eldest child will be in his third year of secondary school in September and we do not feel it is fair to move him away from his school and friends.

Our youngest child is in the first year, has had emotional and behavioural problems and we feel that a school move would be a disaster for her.

We both work full time and just about manage to afford the school fees of £36,000 a year now, having cut back as much as possible on household spending and holidays. An extra 20 per cent on top would be the straw that breaks the camel’s back.

We are also due to remortgage this year and our £300,000 mortgage with 15 years left will go from a five-year fixed rate of 1.5 per cent to about 4.5 per cent, pushing our monthly mortgage bill up by about £800.

Is it possible for us to come up with a solution that involves both covering the school fees and fixing the mortgage?

Our home is worth about £900,000, so we have plenty of equity. Could we fix our mortgage for as long as 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 a savings account earning interest and only taking it when we needed it could work?

Ed Magnus, of This is Money, replies: It is no secret thatLabour is planning a VAT raid on private school fees if the party comes to power.

At present, independent schools can register as charities in return for acts that benefit the local community, such as sharing their facilities with state schools.

Labour has pledged to remove charitable status from independent schools, which would have a significant impact on their tax status.

This would result in private school fees being hit with 20 per cent VAT and scrapping the relief schools receive on business rates among other benefits.

Critics have argued that while the richest parents will remain relatively unaffected, many others who are already stretched may struggle to find ways to raise the extra funds, and some could face the prospect of having to remove their children from their current schooling to move them intothe state sector.

Our reader saysan extra 20 per cent on top of the fees they currently pay would be too much for them to bear. Yet, with their children already at secondary school and their youngest needing extra care and attention, like many parents they do not just want to pull them out and find an alternative state school.

Their solution, they hope, is to raise the required funds from the equity in their home via a remortgage, fixing it for the rest of their children's time in education.

With mortgage rates having risen substantially though, this will be expensive.

This is Money'sTrue Cost Mortgage Calculatorshows that going from a £300,000 mortgage at 1.5 per cent with 15 years left to the same size loan at 4.5 per cent over the same term would push monthly payments up from £1,862 to £2,295.

Adding an extra £150,000 to the mortgage takes monthly payments to £3,442 - an extra £1,148 per month, or £13,776 per year.

This is £6,576 more than the 20 per cent VAT on £36,000 of annual school fees, which amounts to £7,200 per year.

Some of that extra cost could be clawed back by putting the extra borrowing in a savings account and only drawing on it when needed, but this savings interest will be taxed outside of acash Isa.

However, this question seems to be more about securing the extra money for VAT on fees rather than the most cost effective option. But is that extra borrowing even possible, what could it cost, and what may be the pitfalls?

For expert advice, we spoke to Luke Thorne, associate director at mortgage broker SPF Private Clients and Chris Sykes, technical director at mortgage broker Private Finance.

Could they borrow against their home for school fees?

Chris Sykes replies:The short answer to the question is, 'possibly, yes'.

As long as a lender can class the new larger mortgage as affordable given your income and outgoings, then this is possibly something that can be done.

In terms of the fixing for as long as your children are at school, you can get fixed rates for longer than the standard two or five-year period, so this should also be possible to do.

Luke Thorne replies: As you are coming to the end of your fixed rate, it’s a good opportunity to renegotiate a deal without paying early repayment charges, switch to another fixed-rate mortgage for security, and raise cash to cover school fees.

You will need to consider the jump in monthly repayments – you are moving from a rate of 1.5 per cent to circa 4.5 per cent, so that will already be an increase of around £800 per month, plus the interest costs of borrowing another £150,000 on top for the length of the mortgage.

Ultimately, you have plenty 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 back more interest over time but you may feel it is more than worth it to keep your children in private schools.

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Can they keep monthly repayments down?

Chris Sykes replies: One thing you can do to keep monthly payments down would be stretching the mortgage term, or putting some on interest-only.

There may be ways of reducing the monthly payments by extending your mortgage term from the current 15 years to retirement age.

Switching to an interest-only mortgage can also reduce monthly payments, but then you have to have a plan about how you will eventually pay it off at the end of the mortgage term.

Should extra school fees borrowing in a savings account?

Luke Thorne replies:If you raise the £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 are paying higher rates of interest these days – but you would be taxed on the interest and if you are higher-rate taxpayers, that could be significant.

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With an offset, you would only be charged interest when you take money out to pay the fees.

This could work well as you are releasing quite a lot of equity but will pay the fees over several years, rather than all in one lump sum.

You also wouldn’t be taxed on the interest as in effect you aren’t earning any, just reducing the interest you pay on your mortgage.

Offsets can have slightly higher rates than standard residential deals but if you speak to a whole-of-market broker, you can find the best option.

Another thing to consider is that lenders may work out your affordability differently when it comes to school fees.

If you are paying £3,000 a month, some may put that into their calculator and fully take it into account when working out what you can afford to borrow.

With other lenders, if you can show you have ringfenced the money to pay the school fees, it won’t impact affordability.

Have you helped clients with school fees in the past?

Chris Sykes replies: We are quite frequently asked if we can raise capital for a client for school fees, a recent example I had is probably similar to what would suit you actually.

A client approached me recently that felt school fees were a stretch to pay on a monthly basis from their income.

They always wanted to privately educate their children and they didn't want to have to stop doing so.

The school fees for the entirety of the children's education was £350,000 and he, like yourselves, had significant equity within his property.

The tricky thing with these cases is that lenders will often still take the monthly liability of school fees into account, which will factor against you when it comes to affordability.

However, if you borrow the entirety of the fees for the lifespan of the mortgage, then some lenders will disregard the fees from their affordability calculations.

With my client, which is relevant to you, we arranged an offset mortgage so that the school fees money could be instantly drawn at any time, but no interest paid on money that isn’t drawn.

This made more sense for my other client because saving at the mortgage interest rate is more beneficial than making interest on the money, which is taxable.