Subject of school fees requires careful study: Draw-down facilities are a sensible alternative to loans or a doubled mortgage

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MALCOLM FARE has a dilemma. When he asked for advice about how to pay for future school fees, he was told to double his mortgage immediately, put virtually all the money raised by the re- mortgage into a single premium investment bond, and pay out a further pounds 337 a month for a monthly savings plan and life cover.

Mr Fare says: 'Am I being sold a scheme that is principally designed to increase the salesman's commission, or is it genuinely worth considering?'

Mr Fare is 50, his wife is 47 and they have three sons, Clyde aged 12, Oliver who is eight and Alexander, aged 5.

The boys are all at private school. Mr Fare wants to find a way to fund their fees for a further 13 years.

Mr Fare earns pounds 30,000 a year, while his wife, who is self-employed, reckons to earn about pounds 25,000 a year. They have a small amount of savings in a building society.

He says: 'My wife and I could continue to muddle along paying the fees out of income and hoping, like Mr Micawber, for something to turn up as the younger children reach public school age in three and seven years' time.'

Mr Fare went to City Financial Partners of Centrepoint, New Oxford Street, London for advice.

Mr Fare says: 'They suggested that I could double my mortgage from pounds 45,000 to pounds 100,000. The mortgage would be at a fixed interest rate of 8.46 per cent for five years.

'From the extra pounds 55,000 raised on the re-mortgage, pounds 12,000 would be put in a building society. For three years I would use the building society account to meet the extra monthly mortgage repayments.'

According to Mr Fare, City Financial suggested that the remaining pounds 43,000 be invested in a single premium investment bond.

He was also supposed to take out a capital builder plan, which would cost pounds 303 a month and has pounds 27,000 of life cover included. In addition he would have a life insurance policy for pounds 28,000, which costs pounds 34 a month over a period of 10 years.

A spokesman for The Independent Schools Information Service (Isis) said: 'If parents have any qualms about a school fees plan they could pay an accountant to give them an independent assessment of what has been recommended.'

Cathy Gordon, tax partner at the accountants Coopers & Lybrand, says borrowing to pay for school fees is expensive. 'To borrow a large amount now to tie up in an investment is far from satisfactory.'

Anne Feek, managing director of The School Fees Insurance Agency, questions the concept of borrowing from a building society to re-invest into a building society. She says: 'It is really quite weird. It is almost like robbing Peter to pay Paul.'

Joe Collins, of Invest for School Fees, describes the scheme as far too elaborate and totally unnecessary and expensive.

'It does not make a lot of sense to me. I would be very loath for people to increase their mortgage in such a dramatic fashion,' he adds.

Miss Gordon says that parents should only borrow for school fees as a last resort and they should be very clear about the total costs involved.

She advises: 'If you do have to borrow, then consider draw-down facilities. Even these are expensive, but at least you can borrow the money as you need it.'

With a draw-down facility you calculate the total fees you think you are likely to require. You are given a cheque book to pay for the fees as they arise.

The advantage of these schemes is that interest is only charged on the amount borrowed. Normally these arrangements are based on a mortgage.

Claremont Savile, a firm of independent financial advisers, operates the Isis School Fees Special Reserve Plan, which offers a draw- down facility with the Halifax Building Society.

Louise Challis says: 'You can make use of the draw-down facility or not - either way you have the choice and you are not tied into an investment scheme. I would not advise people to mortgage up-front.'

Cheltenham & Gloucester Building Society also operates a draw-down scheme, as do several other lenders.

Dominic Widlake of City Financial, who suggested the original scheme to Mr Fare, has so far not commented to the Independent but has promised to return our call.

(Photograph omitted)

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