Telegraph Money explains how remortgaging, equity release and second-charge loans can help meet rising education costs.
Since Labour removed the VAT exemption for school fees last year, more than 100 private schools have closed, affecting around 25,000 children, according to the Independent Schools Council.
In many cases, the full 20pc tax increase has been passed to parents, with The Telegraph’s analysis finding that the average cost of private education has reached £349,000 from reception until sixth form. If you’re in London or planning a few years of boarding, you’ll need to budget significantly more for your child’s schooling.
Many families have struggled to meet these higher costs. Clare Jupp, the managing director of The School Fees Company, said: “[Some] were just about paying their school fees every month before January 2025, and so, with the addition of VAT on school fees, which in effect gave the equivalent of 4-5 years’ worth of normal inflationary increases overnight, there was no opportunity for salaries to increase in unison.”
Ideally, savings or investments would be used to plug the gap, but it’s not an option for everyone. Instead, many parents are looking to their homes as a means to meet the fees. Here, Telegraph Money explains the options – and their pros and cons.
Release equity through remortgaging
If you have a large chunk of equity in your home, it may be possible to raise extra funds for school fees when remortgaging.
“Most parents on the independent school journey are in their 40s and 50s and purchased property at a time when house prices and interest rates were good. Therefore, most are sitting on equity which is the key to unlocking greater financial freedom for the here and now,” said Ms Jupp.
If you are near the end of your fixed-rate period or on a variable mortgage,you may be able to increase your borrowing as part of a new deal, where the extra sum is simply added to your existing mortgage.
Borrowers coming off cheaper fixed-rate mortgages may find this is not an option as their repayments will already be significantly higher. However, for those with smaller mortgages and sufficient equity in their home, this can be the simplest – and cheapest – way to raise funds for school fees quickly.
Take out a further advance
If you want to take out further borrowing with your existing mortgage lender, but it’s not time to remortgage, you could take out a further advance. This is a second loan alongside your mortgage, which could come at a higher price than other borrowing.
Mark Harris, the chief executive of mortgage broker SPF Private Clients, said: “The lender will want to see evidence that you can afford the extra payments, and this assumes you have enough equity in your home to borrow against.
“The rate of interest may be slightly more expensive than on your standard mortgage, and it may mean you have two parts with different product end dates, which will need keeping an eye on when it comes to remortgaging.”
Second-charge mortgages
To take out an extra loan against your home, but not with your current lender, you might consider a second-charge mortgage.
These act as additional loans that sit alongside your existing mortgage and offer a way to borrow against your home’s equity without changing your primary mortgage product. However, you might need to get permission from your original lender before you can apply.
If affordability allows, most high-street lenders will permit you to have a second-charge mortgage alongside their primary products, although rates are likely to be higher than those secured on your first mortgage.
Failing to repay either of these loans means you could be at risk of losing your home.
Home equity line of credit
Home equity line of credit (Heloc) is a form of second-charge mortgage. It’s popular in America and Australia, but is becoming more prevalent in the UK among parents funding school fees.
While a traditional second-charge mortgage has a fixed-rate period and a defined repayment schedule, a Heloc offers more flexibility. Typically, it will be split into the “draw period” of two to five years, when you can withdraw and repay funds up to a set limit. Then comes the “repayment period”, where any loan that’s still outstanding is frozen and converted to a standard loan that you repay over a set term.
This means you don’t need to borrow the entire loan at the beginning, which can be well-suited for school fees. Henry Vaughan, of Selina Finance, said: “You only pay interest on what you use, from when you draw it down.”
However, relatively few lenders offer this type of borrowing at present, so your options are limited.
Equity release
Aimed at homeowners 55 or older, this form of credit is often favoured by grandparents supporting private education. You can take a lump sum from your home equity, or smaller amounts as drawdown – which may be suitable for paying termly private school fees, or a mix of both.
Ms Jupp cites one client who used this option – a grandparent who had paid off the mortgage on their £1.6m house, and had four grandchildren to put through 15 years’ independent schooling. They took an equity release mortgage to fund this, with a view to reducing the inheritance tax liability on their estate.
However, these loans must be thought through carefully, as equity release deals are complex. There are two main types to choose from.
The first is a lifetime mortgage, where a loan is secured against your home, but it doesn’t usually need to be repaid until you die or move into residential care. The second is a home reversion plan, where you sell all or part of your home (usually at a below-market rate) while continuing to live in it, and the reversion company then gets a cut of the proceeds when the home is sold – again, when you die or move into residential care.
The Financial Conduct Authority requires advisers to hold specific professional qualifications, so it’s worth checking you’re dealing with someone who’s properly qualified.
What are the disadvantages?
While secured borrowing can present an opportunity, it’s important to be aware of its disadvantages.
- Your home is at risk: This is the big one. These loans are all secured against the equity held in your property, so if repayments cannot be maintained, you could lose your home.
- You need sufficient equity in your property: To take out this form of credit, you need to have a home with a significant amount of equity because of the risks of negative equity and being unable to afford repayments. Ms Jupp said “extreme caution” is used for anyone with less than 20pc equity in their property. “There are some client circumstances where we simply have to say we cannot help,” she added.
- You pay more in the long term: As these loans are for long periods, unless you pay them off early, you will pay more interest overall. “Borrowing over longer periods can increase the total amount repaid over time due to interest costs. It’s important to consider affordability carefully and seek independent financial advice,” said Mr Vaughan.
- You are paying for education for longer: The idea behind many of these products is to spread the cost of private education across a longer period to make it more affordable. This means that you are likely to be paying off your debts long after your children have grown up and left school. If you want to take early retirement or don’t have a private pension, you need to consider how you will fund these repayments in later life.