With only a few weeks to go before the start of a new school term, many parents with children in private tuition are again trying to figure out how to meet their annual fees bill.
Short-term solutions are the most unsatisfactory, since they usually involve expensive bank loans, overdrafts or the early surrender of conventional savings policies which should be kept to maturity to fully benefit from bonuses and long-term investment. Saving for your children's second or third-level education by putting regular amounts into a low-cost, high-yield deposit or investment account is the ideal way to ensure your offspring get the sort of schooling you wish. But many parents, with only modest amounts to save, often do not appreciate that the best returns occur only when you have upwards of 15 years in which to save. Life assurance companies, which have been the biggest providers of school fees plans in the past, raise expectations too high by over-emphasising the potential returns of their investment funds, but skirt over the negative aspects of costs and commissions, on-going charges and the need to have a long-term savings frame.
Fee-based financial adviser John Gilmartin of Dublin brokers Gunn Robinson O'Higgins has come across many parents who are caught between wanting a good private education for their children, but not enough years in which to build up an adequate investment fund. His school fees solution is one that is both flexible in the amount that can be saved and withdrawn, carries no extra charges or hidden costs and costs 25 per cent less than conventional savings policies. The only requirement is that the parent has a mortgage.
"Conventional school fees plans in which the charges are made up-front are always going to struggle because investment growth is only significant after 12 to 15 years," explains Mr Gilmartin.
"They have really excellent growth potential if kept for long term, but most parents don`t have that kind of time and many only start saving when their child is age five or six or even older."
A conventional mortgage, however, is something most parents have in this country, says Mr Gilmartin, and if an equivalent amount of savings is paid into the mortgage, it has a greater potential to meet a shorter term obligation like five or six years of school fees than any conventional life assurance savings fund.
He gives the example of a working couple, the C's, who have two children, Harry, aged seven years and Jane, aged three. They still owe £75,000 on their mortgage which has 17 years left to run until maturity. Monthly repayments are £663. The C's want to send the children, from aged 12, to a private secondary school where the fees are currently £1,500 a year.
Mr Gilmartin says this couple should automatically assume annual school fee inflation of 5 per cent and accept that they will need to adjust their savings upwards by that amount each year as well. The total cost of six years each of private school for the two children between the years 2002, when Harry turns 12, to year 2011, when Jane is 17 (Harry graduates in 2007), is £28,849. For two years, 2006 and 2007, when Harry is age 16-17 and Jane is 12-13, both children will be attending the school and the fees burden will be very high - £9,540.66.
"Lenders have no problem with letting you take money out for school fees, or any other purpose once you have built up your fund sufficiently," says Mr Gilmartin. "The money, after all, is yours. But what I have discovered is that if you wanted to achieve the same level of withdrawals, over the same period with a conventional unit-linked savings plan you would typically have had to save £105 a month, or 25 per cent more than our example. And even then the return is not guaranteed because of the nature of investment markets."
"If the C's can afford to put away £84 a month, which will increase by 5 per cent every year, they will be able to pay for these school fees and still pay off their mortgage on schedule," says Mr Gilmartin. "By escalating their mortgage by this amount they are avoiding future interest payments and building up capital in their home very rapidly. By 2002 when Harry starts secondary
school, and until 2011 when Jane graduates, enough of a surplus will have been built up to withdraw the necessary amount every year."
The accompanying table illustrates how the extra mortgage payments work: The first column represents the outstanding amount the C's owe on their £75,000 each year for the next 17 years. Column two represents the annual cost of their mortgage payments, assuming a flat 7.5 per cent interest rate. Column three is the C's annual mortgage payment when the extra payment towards the school fees is added. This sum, which starts at £1,008 is indexed by 5 per cent each year. Column four is the school fees they will have to pay from the year 2002 to 2011. Column five shows by how much the C's mortgage will reduce after the withdrawals of school fees are taken into account. As you can see, they are still on schedule to pay off their mortgage at the end of the 17th year.
This concept of manipulating a mortgage by accelerating its repayment is not original: a few months ago, the First National Building Society introduced a product called Mortgage Master which, for no extra cost, allows the mortgage holder to utilise built-up surplus payments: you can withdraw sums at any time, take a mortgage holiday for a few months and then restart your payments; extra payments can be made monthly or annually or in irregular tranches, perhaps to suit commission or bonus dates. The common thread between Mortgage Master and this particular school fees solution is that they are both cheap, flexible money planning concepts that give back control to the mortgage holder and away from the institution. "Lenders have no problem with letting you take money out for school fees, or any other purpose once you have built up your fund sufficiently," says Mr Gilmartin. "The money, after all, is yours. But what I have discovered is that if you wanted to achieve the same level of withdrawals, over the same period with a conventional unit-linked savings plan you would typically have had to save £105 a month, or 25 per cent more than our example. And even then the return is not guaranteed because of the nature of investment markets." Parents interested in paying future school fees by this method should discuss their current mortgage and savings plans with an independent, fee-based financial adviser or their lender, who should also be able to produce a spread sheet which shows the impact of accelerated payments on their outstanding capital balance. Parents with an existing life assurance education savings plan should have it reviewed. If the fund is not on schedule to pay fees when required, you may want to consider the option of cashing it in and decreasing the outstanding mortgage with its proceeds and then paying the same amount as an additional mortgage payment.
