"The capital raised can then be used to pay school fees and provide them with some breathing space before they make a final decision on the future of their children’s education."
The Labour government recently announced that its plans to impose VAT on private school fees will be introduced in January 2025 as many children return to school after the Christmas break.
While the policy itself has been well publicised, and formed a key component of Labour’s general election manifesto, the timing of its introduction has come as a bit of a surprise for some who expected the policy to be implemented in the 2025/26 school year.
One of the main concerns raised by parents and education commentators is that imposing VAT on school fees half way through the academic year could cause disruption for those pupils nearing exams should they need to move schools.
It also presents further challenges for those parents who may no longer be able to afford private school fees but would like to keep their children in their current setting as they look at the options available in the state sector or wait for a place to become available.
For brokers with clients looking at ways to address this challenge, a second charge mortgage could potentially offer the solution they need. Second charge mortgages work by allowing borrowers to take out a second mortgage on their home while keeping their existing first charge mortgage intact.
The capital raised can then be used to pay school fees and provide them with some breathing space before they make a final decision on the future of their children’s education.
In recent months, Norton Home Loans has seen heightened demand for this type of product as parents began to explore their borrowing options prior to the general election.
With the date for the introduction of VAT on school fees now firmly in place, demand for this type of borrowing could increase even further, particularly among those borrowers with children approaching the end of their school years.
Some of these parents may not want to move their children out of their current setting if they only have one or two years to go, in which case exploring second charge mortgages could provide them with the solution they need.
Obviously, there will be situations where a second charge mortgage will not be a suitable or affordable option, but for those that meet the affordability criteria, a second charge could provide the solution they need.
Of course, there are many other situations where a second charge mortgage can also prove a viable capital raising solution in cases where remortgaging is not an option.
For example, second charge loans can be taken out for debt consolidation purposes, to finance a home renovation and refurbishment project, or even to cover the cost of a wedding or a divorce.
It is also worth pointing out that second charge mortgages can also be used for business purposes such as paying off a tax bill or buying equipment.
In fact, demand for second charge mortgages reached a record high in May 2024, according to the Finance & Leasing Association, with the total amount of new second charge business reaching £124 million in the month - an increase of 18% on the previous year.
While the vast majority of these loans were used for debt consolidation purposes, the uptick in demand illustrates the growing acknowledgement of the sector as a useful capital raising solution.
Given the versatile nature of second charge mortgages, it is important that brokers ensure they consider this product as a possible funding solution for any client with capital raising needs.
While there will be situations where a second charge is not always the best option, in others, it may well be the best and most suitable outcome for the borrower’s needs.
