In 2014, financial education was made a component within the national curriculum. At the time, the government said its aim was “to enable students to manage their money on a day-to-day basis, and plan for future financial needs."
However, estimates now suggest that only around 40% of schools are delivering financial education. So, if you want to ensure that your child leaves school with a good grasp of how they can look after their money, you may need to help.
In our guide, we look at how you can help to teach your children about mortgages and borrowing. Keep reading to find out more.
Teaching your kids about mortgages doesn’t need to be difficult
As parents, your children learn many beliefs and attitudes from you. So, if you’re careless about spending, or use credit poorly, your children may follow this example. If you’re careful with your money, your kids are likely to handle money better as an adult.
Children observe and emulate behaviour, so when you’re thinking about money what you do can influence their later decisions. If you argue with your partner about money, or you are visibly stressed when paying bills then your kids may grow up with similar attitudes.
Dr Richard McManus, Lecturer in Economics and Accountancy and Canterbury Christ Church University doesn’t believe that teaching mortgages and borrowing is tough, and suggests that you start early.
He says: “People should not grow up to be fearful of finances and understanding how to manage them, and therefore, being exposed to learning about how certain instruments work. The earlier the better from my perspective; to postpone just gives this very simple subject the aura and mystic or something more complex than it is.
“Getting a mortgage does not seem like a complicated topic. A down payment on a mortgage is required to reduce the risk for the lender; there is a risk to the lender due to randomness and also due to some lendees being less diligent than others. I think very young children can understand this if it is taught in the correct manner.”
If you need a refresher on what a mortgage is and how it works, read our guide.
Teach your kids how to budget
If your child has an ambition to buy their own home they will need to save a deposit. So, teaching your child how to budget from a young age will help them to learn to put money aside.
For example, keep two moneyboxes – one for ‘spend now’ and one for ‘save for later’. Talk to your child about how they want to divide up gifts or pocket money, and have them think about how they might afford a more expensive item that they want (a phone, game console, pet etc.)
You can demonstrate how a mortgage works by applying the same principle to items your kids might want but can’t afford. For example, your child might want a brand-new game for their console, or tickets to see the latest band.
Ask your children to put down a deposit – just as they would if buying a house – and you can ask them to make a weekly repayment (perhaps £1 a week out of their pocket money) until their debt is repaid. If they miss a payment, charge a penalty of 50p each time.
By doing this, you can show why going into debt is sometimes a good course of action, and reinforce that debts have to be paid to a specific repayment schedule. They will also understand that there are consequences for default, and that they will have to budget over the forthcoming weeks in order to pay you back according to your agreed timetable.
If your children are a little older, you may want to do the same but with a holiday with their friends, or even their first car.
Teach children what debt means
Even if your children have got into the savings habit, there are still some things that they might want to enjoy before they can pay for them. A house or a university education are two common examples.
Sometimes, we have to go into debt to get these things, and it’s here when you gave to explain to your children that sometimes it is fine to borrow money for ‘good debts’. A good debt is really an investment. Your university education will help you in the job market, with graduates commanding higher salaries. And, while a house provides essential shelter, you’re also buying an asset that may grow in value and become your most valuable investment.
‘Bad debts’ typically do nothing other than drain money. Borrowing to buy holidays, cars or expensive electrical goods do little for your net worth, as you rarely end up owning a valuable asset.
Teach your children the difference between good and bad debts, and how taking on a lot of debt can undermine their life goals.
Help your children understand the responsibilities of credit
One of the main challenges facing anyone who wants to apply for a mortgage is that they must have a good credit score.
One way you can really help your child to understand mortgages is to teach them about the tools that lenders use when they make underwriting decisions. You don’t need to go into great detail about how credit scores work, but you can explain how paying off your monthly balances helps you to prove to lenders that you are a ‘good risk’. Perhaps you can apply this to your own example, and refuse your child a further ‘loan’ if they default on their repayments to you?
You should also explain that all debts, including mortgages, have risks attached. If your circumstances change – you lose your job, you have an unexpected bill or you suffer ill health – then it may become tough or even impossible for you to maintain your repayments.
Teach your children how to build up an emergency fund for the times when things go wrong, and how ensuring your mortgage payments are made is an important priority. You could even explain the negative implications of defaulting on a mortgage.