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.
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.