How the school fee hike is hitting Londoners hardest
Means-tested bursaries are based on assets, not just income, meaning many Londoners who live in high value properties but don’t have much to spare are missing out, says Henry Vaughan
Last year’s addition of VAT to school fees has taken its toll on parents and the independent school sector alike.
Figures released by the Independent Schools Council earlier this month reveal that more than one hundred schools have closed since the tax change came into effect – with around one in five of those being in London and the surrounding area – effecting thousands of families.
While the thinking behind the policy is that those with the broadest shoulders can bear more of the tax burden than the rest, the reality is somewhat more complex.
Many parents who choose the independent sector for their children don’t have vast stores of disposable income. Many are, in fact, people who work hard and make sacrifices elsewhere to give their children the best start in life. Increases in school fees impact these aspirational parents the most.
In recognition of this, independent schools themselves have worked to increase the number of bursaries available. The latest data shows an 11.5 per cent rise in fee assistance, as schools work hard to ensure the least well off children aren’t excluded.
The London effect
There is one group of parents however who are doubly impacted by changes to school fee VAT.
Means-tested bursaries assess household wealth based on assets, rather than just income. For many families in London and the South East who have worked hard to pay down mortgages and live in an expensive region of the county, this means bursaries are beyond reach.
Only around one per cent of housing stock nationally is worth £1.5m but in London this figure rises to nearly 11 per cent. There are also a disproportionate number of £1m+ homes in the South East region.
As many will know however, living in a high-value property doesn’t always correlate with being cash rich.
Take those families who might have bought their London home a decade or more ago and have since seen its value increase dramatically. In some cases London house prices have doubled, far outstripping salary inflation over the same period. With significant home equity but average monthly incomes, this has left many families in London facing a stark choice; pull kids out of school or downsize the family home to free up capital for increased fees.
This is especially the case for families who may have been caught by interest rates rising at the same time as house prices. This could leave them in the position of having growing equity combined with growing mortgage payments, meaning a high net-worth on paper combined with strained personal finances.
Independent schools are right to ensure the support is there for the families who need it most as a result of the recent VAT hike. The issue for many Londoners is that they are asset rich by dint of geography, yet their wealth is tied up in property leaving them unable to cover rising fees.
Financial flex
It’s crucial then that financial services providers respond to this by innovating and finding ways to help families unlock wealth stored in bricks and mortar so that parents can invest in their children’s futures and beat the VAT rise.
At Selina Finance we’ve seen the demand for such solutions first-hand. In the first half of last year we saw a threefold increase in the number of parents using home equity line of credit (HELOC) to finance their children’s school fees in line with the recent changes in VAT. This is a uniquely flexible product well suited to this use case, allowing parents to pre-arrange a credit limit which they can draw upon when their school fees are due. This gives parents the flexibility to draw if they need support with that term’s fees, music lessons or other extras, but also to repay and re-draw as required without penalty. This is just one example of the innovative approaches to personal finance that parents are taking as they grapple with higher fees.
As demand for housing in the UK continues to outstrip supply, more and more families in the South East and other high-demand areas could find a combination of asset wealth and modest incomes forcing difficult decisions about their children’s education. Allowing families to leverage asset wealth is going to be key to ensure their children’s education can continue uninterrupted.
HELOC is a second charge mortgage. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
Henry Vaughan is VP of growth at Selina Finance