Home Purchase Plans (Islamic Mortgages)

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:

  • Ijara
  • Diminishing Musharaka

Ijara

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

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

Deposit

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.

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