Families are having to choose between paying private school fees and upgrading their home as banks ramp up scrutiny of education costs in loan applications in the wake of the banking royal commission, mortgage brokers say.
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Education is now a standalone category of expense, and banks are largely determining that private school costs are not discretionary, according to Peter White, managing director of industry body the Finance Brokers Association of Australia.
"It is something that will have rather significant impacts in the [housing] market," Mr White said.
"Parents will be thinking about whether they can afford to send their kids to a certain school."
Mr White said that if school fees chewed up too much of a family's post-tax income, they were being refused loans for an upgrade or an investment property, offered a reduced amount or told to save a higher deposit.
"If you're in the private schooling mindset then you probably believe that's a path you want to take," he said.
"[But] something has got to give, so what is it? Is it the private school? Is it the luxury car? Is it upgrading the house or not getting an investment property?"
Banks previously relied on a statistical index called the Household Expenditure Measure to determine whether an applicant could afford a loan. The measure did not show applicants' actual spending or probe education costs.
About 18 months ago, banks started asking for an applicant's past three months of bank records, to get a clearer view of spending and income.
Education is "absolutely the largest contributor" to the pool of personal expenses now closely examined by lenders, said Adrian Lee, chief executive officer of Catalyst Advisers.
Mr Lee estimates that more than 95 per cent of the applicants for the $250 million his firm wrote in home loans in the past 12 months were able to borrow less than they could have a year ago.
"The addition of education-specific expenses into lending assessment (over and above the previously utilised expense benchmark) is significantly reducing borrowing capacity, and combined with other recent lending restrictions is clearly inflicting downward pressure on the property market.
''In simple terms, the same willing buyers are not able to pay the prices they were happy to 12-24 months ago."
The price of educating children from preschool to year 12 at government, Catholic and independent schools has skyrocketed in the past decade, well beyond the price of inflation, Australian Bureau of Statistics figures show.
In the decade to March 31 this year, prices for preschool and primary schools rose by 55.8 per cent. Prices for secondary education grew by 66.8 per cent. By contrast, overall inflation rose by 23.4 per cent.
Fees at top-tier independent schools can range from $20,000 to $70,000 for two children.
"There's always been a debate about education costs and particularly private school costs: are they what you would call a discretionary cost?" said Mark Hewitt, general manager of broker and residential at AFG, one of the country's biggest brokers.
There's always been a debate about education costs and particularly private school costs: are they what you would call a discretionary cost?
- AFG broker and residential general manager Mark Hewitt
Brokers arrange more than half of the country's mortgages.
"Strictly speaking, it's discretionary because of course you can pull your child out and send them to the local state school and save $30,000 ... it's whether people are willing to do that, and in a lot of cases they're not willing to," Mr Hewitt said.
A spokesman for the Australian Banking Association confirmed that education expenses were being considered by lenders.
"The law acts as an important protection for customers and requires the bank to make reasonable inquiries into income and expenses, for example electricity bills, groceries, medical expenses, mobile phone bills or indeed education expenses.
''Individual banks make their own assessment when considering a loan, taking into account the circumstance of each customer."
Paul O'Shannassy, managing director of Regent Consulting, which helps parents choose a school for their child, said some families were already hiding education costs from banks.
"I've heard of families where [grand]mum or dad pay the fees for a couple of years, whether's it's 20, 30 or 40 grand, and then you get the loan and you pay the loan back and start paying the fees," Mr O'Shannassy said.
Michelle Green, CEO of Independent Schools Victoria, said there was no evidence that greater scrutiny by lenders of family spending had affected enrolments at independent schools.
"Australian Bureau of Statistics data issued earlier this year showed independent schools had recorded their strongest growth in 10 years. That growth was recorded in schools charging all fee levels, but the strongest growth was in low-fee independent schools, charging less that $5,000," she said.
Ms Green said about two-thirds of Victoria's 220 independent schools charged less than $10,000 per student, and the median fee was about $6,700.
The Catholic Education Office did not respond to requests for comment.
Chris Ryan, from the Melbourne Institute of Applied Economics and Social Research, said "growth in fees has outstripped inflation markedly since the 1970s, yet the private school share of students has kept increasing regardless, until recently. The choices of families have been pretty unresponsive to higher fees over a long period."
- SMH/The Age
