Paying school fees using your mortgage

An increasing number of Australians are dipping into their mortgage to pay for school fees, with almost one in five homeowners borrowing against their home equity to fund expenses.

Recent research by Finder found that paying for a child’s education was the second most common reason for households redrawing or refinancing their home loan. Other reasons quoted were to fund home renovations, household expenses or to pay off debt like a personal loan or credit card.

What are the advantages?

Borrowing against your property can be an attractive option to many families as it is a quick and convenient way to access the required funds. It’s generally easier to qualify and there is usually no further credit checks required.

As you’re using your home as security, you can benefit from a lower interest rate than credit cards and other types of personal loans. Note that some mortgage providers may charge a fee for refinancing so this should be factored into the overall funding cost.

Are there any pitfalls?

While this option allows you to take advantage of a lower interest rate, there are some pitfalls that requires caution.

Impact over the longer term

A lower interest rate doesn’t necessarily mean that you end up paying less money over the long term. The benefits can quickly be eroded thanks to the effect of compound interest over the life of your home loan, which is generally a much longer period. Many families end up paying more in total interest as a result.

A bigger mortgage can also extend the lifespan of the loan, which means you might not end up paying if off by the time you retire or end up having to use your retirement savings to pay it off.

So if you do refinance using your mortgage, you may want to consider increasing your repayments to cover the additional amount you borrow for school fees so that you don’t end up paying more over the long term.

Impact of falling house prices

Falling house prices in many capital cities could also be impacting your ability to borrow against your home. This is especially for those who purchased at the recent market peak where the amount of home equity available to borrow might be less than before.

Take note of the market value of your home as recent trends could mean you might have less than 20% equity in your property. This could push you into lender's mortgage insurance territory and incur additional borrowing costs.

Creating a fit-for-purpose solution

One of the reasons why we developed a fit-for-purpose service for education is to help address some of the pitfalls with other loan options.

With an Edstart payment plan:

• We take into account all future school fee costs and ensure families are not borrowing more than may otherwise be needed.
• Families are only charged on the amount they use. We work with each family on the repayment amount and schedule that meets their needs.
• There are no early payment or exit fees.

This means we can make it easier for families to manage their school fee costs and minimise unnecessary expenses.

The information provided in this post is for general information only and should not be taken as professional or personal advice. Before making any financial decision, we recommend that you consider seeking independent legal, financial and other advice to ensure that it’s appropriate for your personal situation.

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