How do hard-pressed families manage the soaring cost of private education in the U.K.? Entrepreneur Joe Hill believes he has a potential solution with a new type of school fees loan secured against parents’ homes.
Hill, the CEO and founder of Secta Finance, says a lack of innovation in the U.K.’s financial services market has left private education out of reach of many families—and forced even many of those who can afford school fees to arrange their finances inconveniently and inefficiently.
Secta Finance’s answer is the Flexiplan, enabling homeowners to borrow against the value of their properties in order to fund private education costs. Crucially, borrowers only draw down funds as and when they need the money—to pay each year’s school fees as they fall due, perhaps—and only incur interest charges on what they have actually taken. The loans are paid off over extended terms of 10 or even 20 years.
“It is incredibly tough for many families to fund private education, so I’ve been really surprised that we haven’t seen better funding solutions emerge,” Hill says. “If we can find those solutions, we’ll make it easier for those already paying fees to carry on doing so, and increase the number of families for whom private education could be an affordable option.”
Secta points to research suggesting that the cost of private education in the U.K. has increased by more than 400% over the past two decades, piling the pressure on the parents of the 7% of the U.K. school children who do not attend state schools. Annual average school fees are in excess of £15,000 for day schools and in excess of £30,000 for boarding schools. Factoring in additional costs, a private education can cost an average of £325,600 per child for day school and £469,700 for boarders starting their schooling in 2019.
Most families fund school fees out of their income, or use lending products such as credit cards and personal loans to make up any shortfalls. But such borrowing is expensive compared to secured debt, Hill points out, and the self-funding route is often problematic for people whose circumstances change or for those with unpredictable income.
“The worst case scenario is that you have to take your child out of school for financial reasons,” Hill says. “But my own experience has been that there have been years when school fees have not been a problem to pay and years when they have been much more of a struggle.” People need more flexibility, he argues.
Under Secta Finance’s Flexiplan, borrowers can arrange loans worth up to 75% of the value of their homes. Where they have existing mortgages, this ratio is reduced by the amount still secured against this first-charge product. Someone in a home valued at £600,000 with mortgage debt of £300,000 outstanding, for example, would be able to apply for lending worth up to £150,000.
Having agreed the facility, provided by a panel of lenders appointed by Secta, the borrower does not have to draw down any money at all until they need it to pay fees—and can then make withdrawals over time as required. Secta charges an arrangement fee of £795, but borrowers only pay interest on funds advanced. Hill believes he can keep the rate on the debt below 4%.
That is more expensive than the cheapest residential mortgages—lenders levy a premium for second-charge loans where a first charge lender is higher in the repayment pecking order. That does mean that for some parents, a remortgage may be a cheaper option. Secta also offers an Advanced product, providing a lump sum for borrowers unable to remortgage rather than a drawdown facility. The potential advantage of these approaches, Hill explains, is that some schools offer discounts when parents pay significant amounts of their fees upfront. The discount may be worth more than the interest savings that the drawdown approach offers.
These nuances point to another issue that concerns Hill about the school fees finance market. “One problem in this marketplace is that parents often don’t understand the different options available to them,” he warns, with Secta also offering financial advice to parents unsure of their best options. “People need more opportunity to discuss what is possible.”
As well as reducing the upfront cost of school fees for families struggling to self-fund, Hill believes Secta Finance’s innovative approach could help families rethink the way they plan their finances. “Many families make sacrifices to pay school fees and then see their disposable incomes rebound once their children’s education is over,” he says. “They might actually prefer to have more disposable income when they’re still financially responsible for their children, repaying the cost of fees later on when their outgoings are lower.”
Hill believes Secta Finance’s innovation will evolve over time—and that schools may also want to engage. “We are creating opportunities for parents, for schools and for children,” he says. “Our strategic aim is to expand the opportunity of private education to many more families and enable a sustainable relationship for parents and schools through the products that we offer.”
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