Sharia-law-compliant home purchase plans
Sharia-law-compliant home purchase plans help you buy your home in a way that doesn’t involve paying interest. They are complex products and there can be a big difference in what firms offer, so consider getting professional financial advice to help you decide. You also need to get legal advice to ensure your right to live in the property is protected.
How home purchase plans work
With a home purchase plan the bank, building society or other provider offering the plan will buy the property and become the legal owner, but with the agreement that at the end of a fixed period you will buy the property from them for the same price they paid. You can still sell the property when you wish.
Since the bank or building society owns the property, you will take out a lease to rent the home from them. The monthly payments you make will therefore be a combination of rent and of money that goes towards buying out their stake. No interest is payable.
At the end of the term, so long as you have stuck to the terms of the agreement, you will have bought out the bank and be the sole owner of the property. This may take some time though.
Sharia-compliant home purchase plans come in two slightly different forms:
- Diminishing Musharaka
Ijara – also known as Ijarah – is a term that refers to the leasing element of a home purchase plan. With an Ijara plan, the monthly payments you make, which are part rent and part capital (and part charges) are held by the bank or building society. They are then used to finance the purchase at the end of the term.
As a result, your share of the property remains constant throughout the arrangement, until the day the lender’s stake is bought out.
Diminishing Musharaka – also known as Musharakah – is essentially a co-ownership agreement. This means that both you and the bank or building society own the property together, with separate stakes. So each repayment – which is part rent and part capital (and part charges) – is used to purchase the bank’s shares in the property over time.
As your stake grows, the bank’s stake shrinks. This reduces the amount of rent you then have to pay for use of the bank’s share of the property.
Deposit, fees and costs
You’ll typically need a deposit of at least 20% of the property in order to qualify for a Sharia-compliant home purchase plan. For example, if the property you want to buy is valued at £200,000, you may need to put down at least £40,000.
Fees and costs
When working out what you can afford remember to budget for the following.
- Stamp Duty – payable at the outset.
- Legal fees – you’ll need to pay for two solicitors – one to act on your behalf and the other to represent the lender.
- Lender’s valuation fee – will vary depending on the property value.
- Buildings insurance.
The firm should provide you with a tariff leaflet detailing all fees and levies it will charge you – see the later section ‘Information you will get’.
Work out what you can really afford
If you can’t afford to keep up your repayments, you could lose your home.
It’s vital that you think carefully at the outset about how much you can afford – not just for the upfront costs, but also to pay each month. Keep in mind that your costs may go up in the future, as the rent will usually be reviewed every six months.
Where can you get a Sharia-compliant home purchase plan?
The following banks currently offer these plans:
- Islamic Bank of Britain
- United National Bank
- Ahli United Bank
- ABC International Bank
Deciding on the right plan – getting information or advice
When you choose a home purchase plan, you can buy based on information – where you alone decide based on the product information that has been provided to you – or based on advice. If you buy based on advice the adviser will ask you questions to understand your financial circumstances and will recommend a product that is suitable and affordable for you. If you buy with advice you have more rights if the product turns out to be unsuitable.
Ask whether you are getting information or advice when talking to your broker or the bank that is offering the home purchase plan – and ideally go for advice if you are not sure which home purchase plan is right for you.
Information you will get
The home purchase plan provider will give you certain important information in ‘Keyfacts’ documents. This means that the information is important and you should read it.
Whether you choose to get information only or advice you should get the following documents:
- Keyfacts about our home purchase plan services – explains the service and the range of products on offer, and gives the names of the firm’s Islamic scholars. These are the people that certify the firm’s services comply with Islamic law. (If you have any doubts about the Islamic nature of the product or services a firm is offering, you should speak to your Imam or an independent Islamic scholar.)
- Keyfacts risks and features of this home purchase plan – explains the key risks, features and benefits of the plan.
- Keyfacts financial information statement sets out the cost of the plan – the overall cost and how much you will pay each month.
- Offer letter including an updated Keyfacts logo financial information statement – you’ll get this when the firm offers you a home purchase plan.
The firm should also provide you with a tariff leaflet detailing all fees and levies it may charge you.
The Financial Conduct Authority requires firms offering home purchase plans to protect your interests. However, there will be limits to what the provider can do. For example, if it goes out of business, or sells its share of the property to someone else, you may risk losing your share of the property and you right to live there.
Get independent legal advice to make sure your interests are properly protected. For example, a solicitor can protect your right to stay in the property by ensuring the lease with the home purchase plan firm is registered with HM Land Registry.
You can check with the Land Registry in England and Wales or the Registers of Scotland (for Scotland) that your lease has been registered by downloading leases and other documents relating to the property for a small fee.