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There are 3 types of home purchase plans

What Are They?

Murabaha – The Bank will buy the property and will sell it back to you on a deferred basis, at a slightly higher price. The property is still registered in your name and you pay monthly payments.

Musharaka– The Bank will buy the property and arrange to lease the property to you. Each month you make repayments, and each repayment covers the rent commitment but also increases your share in the property ownership. As your ownership increases the amount of rent you pay will reduce, as a consequence you pay less the further you are through your plan. Once your commitment to the HPP is complete the lender will then transfer the property solely into your name. This is the most popular form of Islamic finance today.

Ijara – The Lender buys the property and arranges to lease the property to you for the term of your agreement. Once the lease period is completed the Lender transfers the legal title of your new home to you.

This sounds like Shared Ownership?


Buying a house through a home purchase plan has many similarities to a shared ownership scheme, as buyers pay both rent and a proportion of the house value until they own the property. However, one major advantage of buying through an HPP is that when buyers increase their stake in the property, the amount they pay is based on the value of the house when they purchased it. With shared ownership schemes, the value is based on the current market rate — which could be significantly higher than when they first entered into the agreement. This is a huge bonus for the buyer given how fast house prices have risen over the past decade.

As the mortgages are not interest yielding we use a different name to talk about these products, and you may see them referred throughout as home purchase plans (HPP for short) or buy to let home purchase plans (BTLPPs). HPPs are currently only available from a few sharia-compliant providers, but the products are growing in popularity among both Muslim and non-Muslim consumers looking for a competitive, yet ethical, way to buy a house.


Questions?


Answer

Unlike a traditional mortgage, whereby a buyer borrows a fixed amount from a bank to buy a house and then pays this back plus interest over a set term, with an HPP the bank and the buyer purchase the house in partnership.

The bank does not charge interest, as this is not allowed in Islamic finance, but instead charges rent on the part of the property that the customer doesn’t yet own. The buyer also pays an additional amount each month to gradually purchase the bank’s share of the property over a set period.

Answer

Buying a house through a home purchase plan has many similarities to a shared ownership scheme, as buyers pay both rent and a proportion of the house value until they own the property. However, one major advantage of buying through an HPP is that when buyers increase their stake in the property, the amount they pay is based on the value of the house when they purchased it. With shared ownership schemes, the value is based on the current market rate — which could be significantly higher than when they first entered into the agreement. This is a huge bonus for the buyer given how fast house prices have risen over the past decade.