Borrowing money for school fees

I need to pay for my child’s school fees for 2023. The school has offered a 10% discount if we can pay the full yearly cost upfront. I would need to borrow this money from my home loan (I have a flexi option), which I think is worth it if I’m getting a 10% discount. What is your advice on how to go about this? Should I rather look at borrowing the money elsewhere?

Name withheld

Shreekanth Sing, wealth adviser at PSG Wealth, Northcliff, responds:

A home and, for that matter, your children’s education are significant investments, and like all investments, they need to be managed appropriately in order to make sure you get the best possible return.

We need to look at this decision as part of your holistic plan and what impact it has.

The benefit of paying the school fees upfront with money that is easily available (borrowing) is tempting.

When viewed objectively, as of September 2022, the prime interest rate is 9.75% and indications are that this will increase in the coming week by the South African Reserve Bank.

Most home loan interest rates are linked to the prime lending rate, and it may be the case, depending on your personal circumstances, that the cost of borrowing the money from your home loan may cost you more in interest than the upfront discount offered by the school.

Another point to consider is that by borrowing from your home loan you may find yourself in a position where you need to pay back more monthly as your monthly payment will be calculated on the new total amount owing, which includes the outstanding capital and the amount borrowed. Importantly, it will be calculated over the remaining term of your bond.

As you know, the majority of the money you repay to the bank in the first years of having a home loan goes towards paying interest and marginally reducing the principal owed. It is sound financial advice to increase your monthly instalments, even slightly every month, as you’ll reduce the term of your bond, which means that you reduce the term of your bond and pay less interest.

A risk to be aware of and to consider is, should something happen to you were you to pass away or become disabled, do you have sufficient cover to pay off the bond?

You risk losing your house if you default on payments or cannot pay off the debt, and in a worst-case scenario the home may be sold by the bank to recover your loan.

Ideally one shouldn’t borrow the money, as borrowing comes with its costs, namely interest.

In the current inflation and interest rate environment where the cost of money is increasing, you may want to consider speaking to your financial adviser to further assess your options and perhaps put in place a plan where you save monthly for the upfront payment of the yearly school fees. The money you save monthly can be appropriately invested so that the capital is secure and accessible while earning interest. consider?

Name withheld