New free childcare scheme could improve parent's mortgage affordability
Parents with preschool aged children looking to take a step on or up the property ladder could see a 17%1 increase in the amount they can borrow once the government’s new free childcare scheme comes into play, says Yorkshire Building Society.
From September parents with children aged three and four years old could be eligible for 30-hours free childcare a week, meaning they could potentially pocket more than £2103 each month.
With the estimated average monthly cost of full-time childcare reaching a whopping £963.562, parents could see a dramatic increase in the amount they can borrow for a new home or additional loan.
For example, a typical couple both earning the national average salary of £26,1564 with a youngster in full-time childcare receiving the universal free 15-hours childcare a month could borrow a maximum of £182,528 with the Yorkshire over a 25-year mortgage term.
However, if they receive 30-hours free childcare the couple could borrow up to £213,244, an increase of £30,716.
Charles Mungroo, Mortgage Manager at Yorkshire Building Society said:
An expanding family usually means there’s a need for more space, which can be a struggle for parents who are shelling out almost a £1,000 a month on childcare.
The new government initiative is great news for parents’ ability to buy the home they want. The extra cash will really make a difference, particularly for those looking to move on to or up the property ladder.
Parents who are happy in their current property could use the extra cash for home improvements or an extension. They may also consider making overpayments on their mortgage to pay it off quicker. A word of caution though, most lenders will charge borrowers if they overpay beyond a certain percentage of their home loan, so always check the small print first.
Parents can refer to the criteria outlined on the government’s website5 to see if they are eligible for 30-hours free childcare.
1 The percentage difference between £182,528 and £213,244 – the respective amounts a couple earning a joint income of £52,312 3, with a 25-year home loan could borrow depending on if they paid full-time childcare with the current 15-hours free scheme, or if they received 30-hours free childcare a month. Calculations were made on Yorkshire Building Society’s mortgage affordability calculator, and do not take childcare vouchers or tax free childcare into account.
2Figures from the Family and Childcare Trust 2017 survey (https://www.familyandchildcaretrust.org/childcare-survey-2017) reported that the average full-time (50 hours) childcare costs equal £222.36 a week. This means that the average monthly childcare costs are £963.56 (222.36 x 52 weeks / 12 months).
The average hourly cost would be £4.45 (£963.56/ 216.67).
3 Under the government childcare scheme the free allowance is for 38 weeks of the year (the equivalent of the number of weeks in the an annual school term-time.) So this is 570 free hours a year for 15 hours of free childcare a week, and 1,140 free hours a year for 30-hours free childcare a week. The free hours can be used however the parent wishes.
The current universal 15-hours free childcare scheme gives parents a £211.38 discount over 38 weeks (£4.45 x 15 hours x 38 weeks / 12 months = £211.38, ave. cost of monthly free hours). So parents would pay £752 a month (monthly fees of £963.56 less the discount of £211.38).
With the additional 15-hours free childcare (30 hours in total) parents would save an extra £211.38 a month in childcare costs (£4.45 X 30 free childcare hours a week x 38 weeks / 12 months = £422.75, ave. cost of monthly free hours), and would pay on average £540.81 a month (£963.56 less £422.75).
4 Based on Office of National Statics average weekly earnings report from 12 July 2017 which showed the UK’s average weekly salary is £503. Therefore the average annual UK salary is £26,156 (503 times 52 weeks), which would be £52,312 for a couple who both work.