Home purchase plans

Home purchase plans

Published: 01/04/2013

Home purchase plans are also known as ‘Islamic mortgages’. They serve the same purpose as a conventional mortgage – they provide consumers with a means of buying a home – but they are structured in a way that makes them acceptable under Islamic law.

In a conventional mortgage, a financial institution lends money to a consumer to help them purchase a property and the financial institution makes its money by charging interest on the sums lent.

As it is forbidden to pay or receive interest under Islamic law, a home purchase plan is one of the ways Muslims can finance the purchase of their own home whilst keeping to their religious principles.

How do we regulate home purchase plans?

There are two methods of buying a home acceptable under Islamic Law.  The Ijara method is essentially a long-term sale and leaseback arrangement. The provider buys the property, becomes the legal owner and enters into a lease with the consumer giving him the right to rent the property for a defined term, typically 25 years. During this period, the consumer makes regular payments to the provider consisting partly of the rental payment and partly towards the purchase of the property. At the end of the term, when all payments have been made, the legal ownership of the property is transferred to the consumer.

Although they are structured differently to mortgages, they involve many similar risks and features. The current regime applying to HPPs, introduced in 2007, is therefore based on the regime applying to the mainstream mortgage market.

The other method, called Murabaha, is where the provider buys the property and immediately sells it on to the consumer for the original price plus an agreed profit margin. The consumer pays the higher price on a deferred payment basis in line with a fixed repayment schedule and to secure repayments, the provider takes a first charge over the property.

This method falls within the definition of a regulated mortgage contract and so has been regulated by the FSA since October 2004.

The Mortgage Market Review

Although they are structured differently, Home Purchase plans involve similar risks and features to mortgages. They were included under the Mortgage Market Review and will benefit from the reforms we are introducing in April 2014.

http://www.fca.org.uk/firms/financial-services-products/mortgages/home-purchase-plans

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