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School of thought

Financial education will be on the school curriculum from next year but most brokers do not believe that mortgages will be top of teachers’ priorities so there is no real threat to specialist advice

It’s back to school time for millions of kids, and this time next year many of them will be gearing up for financial education lessons.

It means teenagers may need to swat up on APRs and early redemption charges, as well as on how oxbow lakes form and which of Henry VIII’s wives got divorced, were beheaded or died.

From September 2014, for the first time, it will be compulsory for schools to teach pupils about credit, debt, insurance, other key financial products and the main financial decisions they will need to make.

Of course, it will take many years for this to feed through into consumers making more informed decisions, which may prepare them better for the hard sell of banks, for a better understanding of how to budget and for knowing their LTVs from their SVRs.

The issue of financial education in schools is one of those rare topics that unites commentators, as wherever you look and whoever you speak to, most seem in agreement that the plans are positive for the future of the UK.

The matter has even gone right to the top of Government.

“Financial education is really important. We have so many people in our country who struggle with how to understand how mortgage rates and interest rates work,” said Prime Minister David Cameron in July this year when he announced that it would be made compulsory.

Brokers, in particular, are supportive with many viewing it as a step in the right direction.

But they also don’t believe mortgages will be at the top of teachers’ priorities. And as many think kids can only be taught the basics around any financial subject, there is still the need for specialist advice meaning little threat to the mortgage broker market.

“I think financial education around mortgages will be fairly low down on the agenda,” says SPF Private Clients chief executive Mark Harris.

“It may be more useful to first address savings and how to budget, the pitfalls of credit cards, and store cards – the sort of things younger people can get caught with.”

He also doesn’t see better educated consumers as a threat to consumers as fundamentally a mortgage remains the largest financial transaction most people will ever undertake and they still require professional advice.

Anderson Harris director Jonathan Harris adds that no matter how good any financial services education is, it can only provide an outline of what people should be aware of regarding key financial issues like bank accounts, personal loans, mortgages, debt management, savings, investments, income tax and planning for retirement.

“Mortgages are a specialist area with all sorts of intricate detail, terms and technicality,” he says.

“Financial education will not go into this detail so there will always be a place for mortgage brokers.

“Children are already taught the basics around health and fitness but we don’t assume that there is no need for doctors in future. Financial education is a good thing but it will not replace the need for specialists in financial services.”


Hard fought battle

The current plans for financial education, which have yet to be finalised by the Department for Education, come in two parts.

Firstly, children aged 11-14, in key stage 3 at school, will be taught the functions and uses of money, and the importance of personal budgeting and managing risk.

Teenagers aged 14-16, in key stage 4, will be taught about income and expenditure, plus credit and debt, insurance, savings, pensions and a range of other financial products and services.

The revised national curriculum says children need to be taught how to master the “financial skills to enable them to manage their money on a day-to-day basis, and plan for future financial needs”.

Financial education will fall under the ‘citizenship’ section of the national curriculum which also includes learning about the political system.

Getting financial education on the curriculum has been a major battle for the many groups that were championing its cause. The consumer website, in particular, has played a key role.

In 2011, it launched an e-petition on the Government’s website calling for compulsory money lessons for kids, which attracted 118,000 signatures of support.

The key trigger point was when it hit 100,000 in November 2011. When government e-petitions reach this magic number they must be considered for debate in Parliament, which duly happened.

“Getting financial education on the National Curriculum has been hard fought,” says MSE founder Martin Lewis.

“After years of educating our youth into debt when they go to university, we’re finally going to start educating them about it.

“Millions have got themselves into a mess, whether they’re over-borrowing on mortgages and plastic, or falling for payday lenders’ spiel.”


The first step

But he says that while the Government has agreed to put financial education in the draft curriculum, that is really just the first step.

“With many academy schools no longer needing to follow the plans, there’s still a task to ensure head teachers’ desires to teach this crucial subject will be there, even when it isn’t mandatory,” he says.

MSE is not alone in. Another group, The Personal Finance Education Group (Pfeg), has also pressed the Government to include financial education as a compulsory part of the curriculum.

“We are absolutely delighted to see greater prominence given to teaching children and young people about money in the new curriculum,” says Pfeg chief executiveTracey Bleakley.

“We have campaigned for compulsory financial education for 13 years and have wide ranging support from teachers, parents, young people, employers and politicians. We are delighted the Department for Education has worked with us on this.

“We’re moving towards achieving our ultimate goal of ensuring all young people leave school with the skills, knowledge and confidence to thrive and survive in society.”


Too broad to be of practical use?

The tale of Harry Lofthouse, an A-Level student who was on a work experience placement at Mortgage Strategy earlier this year, gives an insight into how current teenagers view finance. He is another who welcomes compulsory money lessons, but his positive words come with caution.

“Schools currently provide almost no financial education whatsoever and this has lead to the majority of students knowing next to nothing about personal finance,” Lofthouse says.

“A greater knowledge of finance could produce a generation more ready to borrow and to use the financial system to their advantage.”

But he is worried the subject could be taught in too broad a manner with not enough detail to be of practical use.

Financial education was due to become a compulsory part of the curriculum in 2010, shortly before the last general election when Labour’s Ed Balls was then the Schools Minister.

It was dropped not because of opposition to money lessons but over the row surrounding sex education given the two subjects both formed part of Personal, Social, Health and Economic Education.

In a bid to rush through legislation in the Children, Schools and Families Bill before Parliament was dissolved ahead of the 2010 Election, a number of components of the bill, including PSHE, were shelved because the major political parties could not reach an agreement before the nation went to the polls.

More than 120 MPs also formed an All Party Parliamentary Group on Financial Education for Young People in January 2011 to pressure the Government into action.

High profile supporters of the group included Aegon, Barclays, Capital One, HSBC and Nationwide Building Society plus consumer groups Which?, Citizens Advice and the Consumer Financial Education Body.

“This is a welcome leap forward towards ensuring the financial capability of the next generation. It is extremely important that all schools offer lessons in this important life skill,” says Conservative MP Justin Tomlinson MP, chair of the APPG.

It is unsurprising so many support financial education in schools when you consider the mess many have got themselves into.

Latest statistics from the Credit Action charity show outstanding personal debt stood at £1.425 trillion at the end of June 2013, up from £1.421 trillion at the end of June 2012. At the end of June 2013, individuals owed nearly as much as the entire country produced during the whole of 2012.

Much of this is mortgage debt which can be described as ‘good debt’ as long as borrowers can afford it.

But unsecured debt, such as loans and credit cards, stood at £157.8bn at the end of June 2013.

Time and again we read in the consumer press of sad tales of struggling borrowers which has created a market in which payday and other short-term lenders can flourish.

Only record low interest rates – with base rate having stood at its rock-bottom 0.5 per cent level since March 2009 – have prevented repossessions being higher. Latest figures from the Council of Mortgage Lenders show in the first six months of the year, there were 15,700 homes seized by lenders, the lowest number since the second half of 2007.


Intricacies of credit ratings

Another organisation that has championed the need for financial education is credit reference agency Experian.

One reason for its support is the lack of knowledge about how clients’ credit rating affects their ability to get a mortgage.

In a survey it conducted last year around a quarter of respondents thought that missing repayments on credit cards and mortgages would have no impact on credit scoring.

As brokers know, the consequences of just one missed payment can be catastrophic for a borrower’s chance of getting a home loan. And just the sight of a payday loan on an application can destroy any hopes of getting accepted.

Meanwhile, in the same survey, around a half of people had no idea that registering to vote can help credit applications, because it allows lenders to identify the applicant.

“We know many UK consumers really struggle to understand mortgage decisions, particularly the factors that do and don’t affect credit scores,” explains Experian head of consumer affairs James Jones.

“Failing to get to grips with even basic issues such as this really isn’t good news for consumers, especially at a time when many lenders continue to shun all but the most creditworthy applicants.

“We are now working hard with organisations such as Pfeg to make sure as many of our schools use these resources as possible, giving future generations a real helping hand onto the mortgage ladder.”

While many clients struggle with the intricacies of credit ratings, it is no different when it comes to mortgages themselves and the components that go into them.


Decoding best buy tables

A common complaint among those in the know is the reliance on best buy tables that see the deals with the lowest rate at the top without incorporating the fee, as this can confuse borrowers.

Currently many deals have fees of more than £1,500, some in excess of £2,000.

So a deal that is only a few basis points clear at the top of the charts, but which comes with a large fee, may not be so attractive if the next best has a lower fee.

Then there is how bonuses and commission are counted as income and all the jargon such as LTV and SVR, often expressed as abbreviations rather than spelt out to explain what they really mean.

“As brokers we have to do a lot of hand holding, although the level of knowledge clients have varies significantly,” explains Jonathan Harris.

“It is sometimes surprising that some high calibre applicants are often very naïve regarding the mortgage market and process. Many people are familiar with the basic concept of mortgages but borrowers can’t rely on best buy tables, adverts and promotions as everyone’s circumstances are different and every lender has its own unique criteria and quirks.”

Mortgages also have many hidden pitfalls and benefits that may not always be apparent to borrowers. For example, the now largely defunct extended tie-in period may well have cost homeowners dear, though there are still less obvious dangers such as the large fees for missing a payment or when paying off a mortgage.

While these charges will be documented, they may still take borrowers by surprise when levied.

On the flip side, some deals come with what is effectively a hidden offset facility, which is a huge bonus.

When the Co-op had the best buy five-year fix earlier this year at the then rate of 2.79 per cent with a £999 fee it also allowed borrowers to overpay by 10 per cent a year, but crucially, also allowed them to borrow any overpayments back.

On a £200,000 mortgage, borrowers could overpay £20,000 in year one. To get a 2.79 per cent return on savings, that would require a savings rate of 3.48 per cent rate as a basic rate taxpayer and 4.65 per cent as a higher rate taxpayer, which is impossible to achieve in a standard account at present.

But how many borrowers would have spotted this, particularly as the deal was not available via brokers who could explain?

The information was virtually impossible to find on its website, and was tucked away on page six of the lender’s welcome pack under the heading under the heading “building and using an overpayment fund” which hardly sells it.

One could argue that even the most financially educated borrower would struggle to spot this, but at least they would understand the benefits of overpaying, and the potential for this flexible feature to exist.

And when it comes to overpaying, how many borrowers really understand just how much in interest they will save by putting a few extra pounds aside each month to pay off a little extra on their mortgage?

Overpaying by £100 a month on a 25-year repayment mortgage at 3 per cent would save more than £12,500 in interest over the term, assuming a constant rate.

“Borrowers mostly struggle with rates, fees, LTV, criteria around income, bonus and commission, and self employed and contract and trust income. This can all be very confusing,” Mark Harris adds.

Many believe regulations around mortgages do nothing to help borrowers understand exactly what the loan will cost.

In particular, there is much opposition to the use of APRs, given the true rate over the length of the loan is unknown.

John Charcol senior technical manager Ray Boulger is one of the fiercest critics of mortgage APRs. He uses the example of a two-year fix where APRs are useless because after the term ends they could remortgage or move to completely unknown SVR.

So while virtually everyone supports financial education in schools, as Lofthouse believes, it would need to be specific enough to have practical use for students.

And whatever the UK’s financial knowledge, even when the new era begins, there will still be plenty of work to do for borrowers and other customers to jump the many hurdles banks and other financial firms place in front of them to encourage them to take out sometimes useless products and to make high fees less obvious.

A potential for greater financial knowledge does not scare brokers who still believe their advice will be as important as ever.


Stephen Uden, Head of Citizenship, Nationwide Building Society


Nearly three-quarters of the UK working population has either ‘poor’ or ‘entry level’ numeracy, roughly equivalent to the standard expected of children by the end of primary school, according to the Skills for Life survey.

This poor level of numeracy means millions of adults are not equipped to deal with everyday money management such as understanding savings and loans rates, so they are likely to really struggle when it comes to understanding mortgages.

In such cases the role of the lender or intermediary is vital in guiding would-be borrowers through the process to ensure they get the most appropriate home loan and understand their financial responsibilities. However, I would argue that financial services providers also have a major role to play in improving the public’s financial capability.

As part of Nationwide’s ‘Living on your side’ Citizenship programme, we work with a wide range of organisations to tackle financial capability, such as the Money Advice Trust, which helps 200,000 individuals and small businesses every year with initiatives such as the National Debtline and the My Money Steps website. We also support Shelter and Citizens Advice to provide counsellors giving direct help to support people struggling with debts or who are at risk of losing their homes.

But to make a real difference the problem of numeracy needs to be tackled at the root, which is why the inclusion of financial education in the maths and citizenship school curricula from September next year is something Nationwide has campaigned for and whole-heartedly welcomes.

Our own research found that more than 75% of Brits believe it would be beneficial for young people to be taught financial planning in schools, whilst just over half of people feel their financial situation would be better had they learnt about money management at school. Nationwide has a great track record of providing support in financial education to teachers and parents through our Nationwide Education programme, with our employees running financial education sessions in 140 schools over the last 12 months.

We have gone even further by agreeing a five-year £650,000 partnership with the charity National Numeracy, supporting them with their plans to improve numeracy teaching and learning in schools, as well as running campaigns more widely with families and employers to challenge attitudes towards numeracy.

Tackling numeracy early will help customers and providers alike. The Skills for Life survey also found that adults who struggle with numeracy are likely to earn on average 26% less and are more likely to be unemployed.

So putting financial education on the school curriculum will not only help to equip people with a better understanding of money, it will also lead to more informed and aspirant consumers who will make more use of the products and services we have to offer.


Matthew Fleming-Duffy, mortgage and finance broker, Cherry Mortgage & Finance


Simple, but thorough, financial education should be welcomed if brought to the classroom, to enable children to make informed decisions when they come of age and are able to borrow money.

All too often people will have their own ideas formed by friends and family or have found misleading or out-of-date information from the internet – and that goes for even some of the most trusted websites – and this can have a negative impact on their mortgage-ability and essentially their monthly budget.

Adding financial education to the curriculum is a very good idea and, quite frankly , I cannot understand why it has not been done sooner.

I have three young sons and will do my best to give them an education in what to do and what not to do when it comes to managing their finances properly but most children don’t have the benefit of an in-house adviser. I do hope they will listen to ‘good old dad’, but I doubt it so roll on financial education.

My experience tells me that most first time buyers and many home movers are still relatively unaware of the processes and even unaware of the consequences of their historical decisions when it comes to applying for a mortgage. Borrowing a large amount of money is something that most of us face when we buy a home and we should be prepared and well-informed when we do so.

Certainly obtaining a mortgage these days can be simple, however it can also be laden with difficulties and potentially unresolvable issues. Sometimes you really won’t know until you make your application, have your case underwritten, property surveyed and have your legal work undertaken.

It’s also something we don’t do very often; we may move once or twice or even a dozen times in our lifetime. To compound this, there are a multitude of banks advertising their products and they all have their own individual criteria which, even for an intermediary, can be difficult to keep up with as they change frequently.

Education will go some way to guiding individuals down the right path however the internet has created the ability for people to conduct their own research these days – particularly for those of the younger generation.

Banks deal with vast numbers of consumers so I do firmly believe that using an intermediary helps to personalise a consumer’s journey when applying for a mortgage, helping them chose the right product from across the market and assisting them during the course of the application, particularly if something goes wrong.

Their in-depth financial knowledge, experience and ability to conduct targeted product comparisons should not be under-valued.



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