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 might 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 might need to put down at least £40,000.
Through providers of Home Purchase Plans, you can also use the government-backed Help to Buy scheme which means you’ll need a deposit of between 5-20%.
The Help to Buy: HPP guarantee scheme is aimed at helping first-time buyers and home movers. It is similar to the Help to Buy mortgage guarantee scheme, but it takes into account the different ways that a Home Purchase Plan is structured.
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 might 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
Getting advice on the right plan for you
Since April 2014, home purchase plan providers must offer you an advised service. This means they must ask you questions to understand your financial circumstances and only recommend a product that is both suitable and affordable for you.
Providers must also assess whether a conventional mortgage would be more suitable for you.
You do have the right to reject the advice you’ve been given, but buying after taking advice gives you more rights if the product later turns out to be unsuitable.
Information you will get
Key information about the firm’s service
The home purchase plan provider , whether a lender or adviser, must explain to you the key messages about the service they will give you.. This must include:
- Whether you will have to pay for their service and, if so, the fees they charge.
- The range of products on offer, making it clear if there are any limitations. A lender, for example, only offers its own plans whereas a broker can offer a wider range. You will be given 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.
Ask for this information in writing.
Keyfacts about the home purchase plan
Where a product is recommended they must also give you the following documents:
- 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 overall cost of the plan and how much you will pay each month.
- Offer letter including an updated Keyfacts financial information statement – you’ll get this when the firm offers you a home purchase plan.
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 might risk losing your share of the property and your 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.