What is a Home Purchase Plan?

A home purchase plan is a type of mortgage agreement which does not charge you interest on the amount you borrow. Since both making and receiving interest payments is forbidden under Sharia law, home purchase plans are of particular interest to Muslims who are looking to buy property. For this reason, this type of agreement is often known as an Islamic Mortgage.
With a home purchase plan, you choose a property which the mortgage lender then buys on your behalf. You pay a small contribution to the purchase, typically around ten percent of the property’s value. Legally, the property belongs primarily to the lender: they own a ninety percent share and you own a ten percent share. You then make monthly repayments for an agreed period of time. These repayments consist of a small proportion of the amount borrowed and a rental payment. You agree to pay rent to the lender in exchange for living in their property, which they legally own until the end of the term. At the end of the term, as long as you have made all the required payments in full and on time, you become the legal owner.
You can borrow up to ninety percent of the property’s value, but lenders will typically only allow you to borrow a maximum of to three times your annual income, which is slightly lower than the amount you are usually able to borrow with a standard mortgage.
Types of Home Purchase Plan
There are two main types of home purchase plan: The Ijara and the Musharaka (Diminishing Musharaka). Since lender’s deals do vary, ensure you compare details of these plans carefully.

  • The Ijara – This is the most popular type of home purchase plan in the UK because it is often the most affordable. Monthly repayments are fixed and made over a long period of time, typically twenty-five years. In addition to the repayments you pay a monthly rent, which can be adjusted by your lender each year. In some cases, the rent may decrease rather than increase in line with inflation, because you gradually repay the amount you borrowed. You can usually borrow up to ninety percent of the property’s value, which means a ten percent ‘deposit’ is required. The Ijara is usually more flexible than the Musharaka, since you are often allowed to make lump-sum payments if you wish. However, unlike a standard mortgage, overpaying will not reduce the term but will reduce your future monthly repayments. With the Ijara mortgage, your legal share of the property does not increase over the term: you become the legal owner only once you have paid the last installment. This is not the case with a Diminishing Musharaka, whereby your repayments go towards purchasing small shares of the property each month.
  • The (Diminishing) Musharaka – This is offered by fewer lenders than the Ijara because it is often less affordable. With this plan, repayments are fixed and made over a shorter period of time: typically fifteen years. For this reason, your monthly repayments will be larger than with the Ijara plan. In addition, you are required to pay a larger ‘deposit’, which is usually around twenty percent of the selling price. The monthly payment you make to your lender goes towards purchasing an extra share of the property, which means that the size of your share of the property increases each month until eventually, you own the whole property. In addition, you will usually be required to pay rent in return for living in the property while it belongs to your lender. When you take out this plan, you agree the ‘total amount repayable’. This is the amount which your monthly payments pay off over time, and will be greater than the amount you borrowed.

Home Purchase Plan Providers
Home purchase plans are still relatively new and only offered by a limited number of providers. However, more and more high street banks and building societies are introducing their own home purchase plans, which means that it should be easier to find a deal that is right for you. Although the Financial Services Authority (FSA) regulate these lenders, it is your responsibility to ensure that their plan complies with Sharia law: ask your imam if you are unsure.
The Drawbacks to Home Purchase Plans
Although a home purchase plan has a number of advantages, there are several drawbacks you should consider before making a decision. Home purchase plans are often more expensive than conventional mortgages. There are a number of reasons for this: in most cases, you repay both the amount borrowed and an additional rental payment. Rent is negotiated each year, which means that, like any rental agreement, your payments could increase. In addition, there are fewer home purchase plan providers than there are mortgage lenders. This means that there is less competition, which also increases the typical cost of these schemes

Share Button

Comments are closed.