Yes Prime Minister – your mortgage is going through the roof!

Living rent-free for 10 years in a prestigious London address might seem like a nice idea but with house prices are going through the roof it can be a struggle getting back on the property ladder when your deal ends.

And that’s what Tony and Cherie Blair are finding out as their stay at Number 10 Downing Street comes to an end.

Last year they bought themselves a townhouse in London’s fashionable Connaught Square for a huge £3.5 million. Experts reckon they’re using an interest-only mortgage, meaning the power couple now have a massive debt to deal with.

We’re not all former PMs with a lucrative career on the lecture circuit to look forward to. But we still need advice on how to cut mortgage costs and MoneyExpert.com advises on how to make the right mortgage choices.

Stepping off the property ladder

Living rent-free at 10 Downing Street over the last 10 years might have saved the Blairs some money but they have missed out on Britain’s property boom.

In the mid-90s the Blair’s picked up a house in Islington for £375, 000. When 1997’s election victory came around and a move to Number 10 was on the way, they sold up and walked away with a £300,000 profit.

That seemed like a good move. However the property went back onto the market in May 2006 and sold for £1.6 million, meaning the Blair’s have missed out around £1 million. On top of this disaster, the couple are estimated to have lost around £50, 000 on two luxury flats in Bristol which they purchased when the market was at its peak.

Tony won’t be happy to hear the estate agents view on his new property either. The consensus is that it is over-priced and they could have got somewhere a lot more secluded in an area like Great Portland Street. Tony will be hoping that the much talked about house price slump, doesn’t deliver him a further property blow.

What are the options?

Few of us will be taking out such huge mortgages as the Blairs but we still need to think carefully about what type of mortgage will suit us best.

You need to shop around – have a look at MoneyExpert.com to make comparisons between different types of mortgages. Try and arrange an appointment with a mortgage advisor to talk them through in detail. Be aware though that these advisors will only discuss their own company’s products so you need to use a comparison service.

The Blair option – interest only

The Blairs have reportedly taken out an interest only mortgage. A mortgage like this has its benefits. You’re only paying off the interest rather than the money you’ve borrowed. This will cost you less, so you can borrow more. If you borrow £200,000 at six per cent on an interest-only basis the monthly payment would be £1,000. If you borrowed on a repayment basis you’d pay £1,300.

If the price of your house grows significantly, you might end sitting on top of a nice little earner at a minimum monthly cost.

The capital debt will have to be paid eventually, and when you do start paying it, it is going to cost you more as you won’t have been making a dent in to it. If you are confident about a growth in your future earnings like Tony and Cherie then it is certainly worth considering but you’ll just be deferring the cost.

Pay now not later

If you don’t want to gamble on your future earnings and wish to start paying now then you can take a repayment mortgage. Once you’ve made that choice there are other decisions to take.

Tracker Mortgage

This motgage does what it says it will – it ‘tracks’ or follows the Bank of England’s base rate plus a certain amount for a set period. That decides how much you pay every month.

The Bank reviews interest rates every month so if it increases rates you’ll pay more for your tracker mortgage while if it cuts rates you pay less. Currently the base rate is on the rise – it’s now at 5.25 per cent – and experts predict another increase in 2007.

This means that the amount you pay to your mortgage provider will vary depending on whether the Base Rate changes. At the moment trackers are generally cheaper than fixed-rates, but if the Bank’s base rate continues to go up this may change.

Get in a fix

Everyone likes peace of mind. That’s why fixed mortgages are the most popular type of mortgage around. They’re very simple – a fixed mortgage ties you into a pre-arranged interest rate for a set period of time, often two or three years. There are some for five, 10 or even 25 years, but these are less common.

Most people choose fixed rate deals because they feel safe in the knowledge that their repayments won’t change at all for that period. They know exactly what they’ll be repaying on a monthly basis and can relax knowing their mortgage is covered.

There is one note of caution – when fixed rate deals expire, you’ll automatically be put onto your lender’s standard variable interest rate, which is typically much higher than the other deals. Unless you actively go out there and select a new fixed rate or other deal, your repayments will rocket until you can agree a new arrangement with a lender.

A further note of caution, recent base rate increases mean that lenders have increased the administrative charges on applying for fixed rate mortgages by around 20%. However there are still good deals to be had.

Stressful times

Mortgages payments make up a large percentage of most people’s monthly outgoings. For this reason its important to get the right option for you. If you look around, decide upon your mortgage type and borrow what you can afford you should be able to find a lender you’re happy with. Take a look at MoneyExpert.com for a view of what mortgages are available today.

Time will tell whether the Blair’s have made a wise investment. Tony will be hoping that the stress of politics and policy in Downing Street doesn’t turn into the stress over mortgage repayments in Connaught Square.

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