This new system is replacing mortgages for home buyers in the UK

Young Muslims in the UK are increasingly looking to purchase their own homes, and in the last few years, Shariah-complaint Home Purchase Plans (HPPs) have become especially popular. But it isn’t Muslims alone who are signing on for these.

Keith Leach, Chief Commercial Officer at Al Rayan Bank, told My Salaam, “Not all our customers are Muslim; the growth in our customers in recent years has been among non-Muslim customers. The products have attracted a wide range of customers. People are drawn to Islamic finance increasingly as it’s seen as an ethical alternative to traditional banking.”

In a further boost to Islamic home-buying in the UK, HPP buyers can also now take advantage of the “Help to Buy” scheme after ministers launched a version compliant with Shariah law. The multi-billion-pound scheme allows buyers with only a 10 per cent deposit to get on the property ladder, with the taxpayer guaranteeing part of the mortgage.

HPPs work in a different way to conventional mortgages. HPPs are based on the Islamic finance principles of diminishing musharakah mutanaqisah (partnership) and ijarah (leasing).

With HPPs, the customer and the bank purchase the property together, with each owning a share. The customer pays rent on the share of the property that the bank owns in addition to a monthly acquisition payment that gradually increases their stake in the property. As the term progresses, the customer’s share in the property increases until all payments have been made and ownership of the property transfers to the customer.

Currently, three banks in the UK offer HPPs: the largest is Qatar-owned Al Rayan Bank, followed by United National Bank and Ahli United Bank. Al Rayan provides the widest range of HPPs, including buy-to-let and commercial property finance.

Al Rayan’s Leach said that Muslims have traditionally used HPPs, but since 2013 the bank has offered ‘expat HPPs,’ which help British expats to purchase property in the UK. “We’ve seen a 141 per cent increase in this part of the business since, and these have included applications from non-Muslims.”

THINGS TO CONSIDER WHEN BUYING A HOME

According to Brian Adams, Director of Rochdale-based independent financial advisory Islamic Wealth Management, the considerations for buying a house on an HPP are very similar to buying a house with a conventional mortgage.

Adams said, “Purchasing a house with an HPP, like a conventional mortgage, is really about your affordability. What size deposit do you have? Can you afford the payments? This will impact on your rental rate in the same way as a conventional interest rate.”

He added, “Can you afford the payments now or if rates were to increase in the future? HPPs operate under exactly the same rules as every mortgage provider in the UK and there are stringent eligibility tests. All banks go through the same process.”

Leach agreed that Muslim homebuyers, like conventional buyers, should save very hard and be careful not to overcommit themselves. “Any customer, young or old, should consider these questions before applying for any home finance product.”

He said that it’s important that customers understand that HPPs are structured differently to conventional mortgages and that interest forms no part of the agreement. ”Throughout the finance period you pay a rental charge, which you use to rent the banks portion. Your monthly payment is made up of two payments.”

He added that the UK has taken a pioneering approach to Islamic finance. “Successive governments have shown a genuine commitment to ensuring [that] Muslims in the UK are not financially disadvantaged because of their faith and can access the same benefits, where possible, as customers of a conventional banks.

“But while it is certainly true that we can provide young Muslims today with access to far more financial products than were available in 2004, when we started, there is still room for growth.”