Managing my money
Managing my money

Start this free course now. Just create an account and sign in. Enrol and complete the course for a free statement of participation or digital badge if available.

Free course

Managing my money

6.2.4 Remortgaging – a few sums

Activity 2

For the purpose of this activity let’s keep things simple by considering an interest-only mortgage – the sums for a repayment mortgage will be a bit different but will follow the same principle.

Assume the fixed rate deal on a 25-year interest-only mortgage of £100,000 ends in three years.

  • Currently the Barnett household is on a fixed rate deal at 5% p.a. If they repay now, the lender will charge an upfront six-month interest penalty.
  • They have savings earning 2% p.a. net interest, which could cover this cost, and another lender has offered them a three-year mortgage at 3% p.a. and will cover all the other costs of remortgaging.

Should the Barnetts pay the penalty and remortgage?


The calculation goes like this.

The six-month penalty costs the Barnetts 2.5% = (5% for half a year), which is £2500 = (2.5% of £100,000).

If they keep the £2500 invested at 2% for three years, leaving the interest in the account, this will total £2,653 at the end of the three years. This is because the interest would be compounded (you learned about compounding in Week 4).

The calculation is:

(£2500 × 1.02 × 1.02 × 1.02) = £2653

The annual savings with the new lender are:

5% - 3% = 2%.

For each year, the household would save £2000 = (£100,000 × 2%), totalling savings of £6000 over three years.

So, even if the Barnetts do not invest the annual sum saved, the minimum benefit from remortgaging is £6000 - £2653 = £3347, implying that the financially capable household should remortgage.

Figure 6

Take your learning further

Making the decision to study can be a big step, which is why you'll want a trusted University. The Open University has 50 years’ experience delivering flexible learning and 170,000 students are studying with us right now. Take a look at all Open University courses.

If you are new to University-level study, we offer two introductory routes to our qualifications. You could either choose to start with an Access module, or a module which allows you to count your previous learning towards an Open University qualification. Read our guide on Where to take your learning next for more information.

Not ready for formal University study? Then browse over 1000 free courses on OpenLearn and sign up to our newsletter to hear about new free courses as they are released.

Every year, thousands of students decide to study with The Open University. With over 120 qualifications, we’ve got the right course for you.

Request an Open University prospectus371