Getting on the first rung of the property ladder is becoming more and more difficult due to widening gap between property prices and affordability levels of first time buyers. Gordon Brown has informed the public of his intention to stimulate the growth of affordable house building projects but more solutions need to be found to help those who want to buy property.

One solution that could become increasingly popular is a shared equity mortgage (SEM)

SEM is a mortgage product with two components. One component is a conventional mortgage. The second component is a Residential Ownership Loan (ROL). The ROL funds a percentage of the purchase price and is repaid with the same percentage of the sale proceeds when the property is sold again. The low interest rate charged on the ROL permits larger total borrowing than is affordable with a conventional mortgage.
 
As an example, a buyer could fund a purchase of £160,000 with a deposit of £5,000 plus a mortgage of £107,000. The balance of £48,000 would be provided by a Residential Ownership Loan. This ROL would therefore be for 30% of the £160,000 initial value.

If the property increases in value by 25% to £200,000 by the time it is sold, the company providing the 30% ROL would receive 30% of this, which is £60,000. The borrower would receive 70% of the £200,000 which is £140,000 minus any outstanding mortgage.

Conversely, if prices fall then the borrower is only responsible for 70% of the fallen value. The company providing the ROL is effectively investing in UK residential property. Although 80% of applicants are first time buyers it can be attractive for those who want the lifestyle option of larger home but smaller repayments. Adventurous investor/borrowers who want more residential property for their repayments may also find these arrangements to be interesting. With no obvious end in sight to increasing house prices, especially in the longer term, then innovation and action is needed to help the new prospective property owners.