Question 1

How do Home Purchase Plans (HPP) work?

Accepted Answer

Sharia-compliant Home Purchase Plans provide a mortgage alternative that adheres to Islamic finance principles. Rather than a traditional borrowing/lending relationship, Home Purchase Plans are based on co-ownership (Diminishing Musharaka) and leasing (Ijara). As a result, HPP customers avoid interest charges, which are prohibited in Islamic finance.

Question 2

Are Home Purchase plans more expensive?

Accepted Answer

The cost of a Home Purchase Plan (HPP) may differ from traditional mortgages, and do tend to be more expensive than conventional mortgages but many clients are willing to accept the extra cost so they have a product that fits in with their religious beliefs. HPPs operate based on co-ownership and leasing principles, rather than a traditional lending/borrowing relationship, which may affect the pricing structure. It's important to seek professional advice and compare options to find the most suitable and affordable option for your circumstances.

Question 3

Can you explain to me what the 'Repayment' Method is

Accepted Answer

The 'diminishing' Musharaka (partnership) is the prevalent method of Islamic Property Finance. Each month, you pay rent to the Bank for their share in the property, and additionally pay towards buying more equity from the Bank. At the end of the term, you become the 100% owner of the house and no longer pay rent.

Question 4

Can you explain to me what the Rent only method is.

Accepted Answer

Rent-only finance only requires you to pay rent on the Bank's share of the property and not towards acquiring more equity. This can lead to lower monthly payments, but you'll still need to purchase the Bank's share in the property at the end of the term. Generally, this option is only available for Buy To Let finance (BTL).

Question 5

Do I ever own the property with a Home Purchase Plan?

Accepted Answer

Initially at the start of the finance agreement, you and the Bank jointly own the property.  With every Home purchase plan payment you make, your equity in the property increases and the rental element decreases, reducing the Bank’s share on a diminishing basis.  At the end of the term, ownership of the property transfers to you outright.

Question 6

Why are Sharia compliant finance products benchmarked against the Bank of England Base Rate?

Accepted Answer

It is crucial to note that Sharia allows the use of benchmarks as long as they are commonly acknowledged and accessible. For Islamic finance, using a benchmark is a significant aspect as lenders must ensure that their products and prices are transparent and conform to the local market. That is why they use widely recognised indices, such as BBR (Bank of England Base Rate), to price their products and satisfy these critical requirements.

If banks were to use local rental market rates, there would be too much variance across the country and local economies and therefore would not be able to offer consistent and fair pricing across the country for all customers.

It is important to add that, with leases the rent is reviewed periodically. When the benchmark rate increases or decreases, the rent charged to you is adjusted accordingly. At future rent reviews, the bank will also take into account any additional acquisition payments when assessing the new rent figure. The bank will write to you and confirm any changes in good time.

Question 7

Who holds the legal title with Home Purchase Plans?

Accepted Answer

It is a requirement for the Islamic Bank to issue the lease which will grant you the right to occupy the property in accordance with the laws of England and Wales. Although the freehold title will be held by the lender, your rights, including your beneficial share, will be safeguarded by registering the long leasehold in your name at the Land Registry. In the case of leasehold properties, the Bank's name will be registered as the owner of the long leasehold, while the sub-lease will be registered in your name. Since the property is being leased to you, you will not immediately become the legal owner, but you will become the legal owner once you have acquired the lender's share in the property.

Question 8

Why is there two solicitors dealing with the property purchase or refinance?

Accepted Answer

To ensure compliance with the Sharia principles and applicable law, the Law Society suggests that for Islamic finance transactions, two sets of solicitors are involved. One set of solicitors represents you; the other set of solicitors represents the lender.

Question 9

Can I switch from a conventional mortgage to a shariah compliant bank?

Accepted Answer

In short, Yes. This process is similiar to a new purchase and will require a full mortgage application. For Home Purchase Plans, your adviser will need to have the HPP permission to give you advice and act on your behalf.

Question 10

What happens with Negative Equity and selling my property?

Accepted Answer

If your property value is less than the outstanding amount you owe to the bank, Sharia allows the bank to decline your sale. Nonetheless, you can purchase the banks share for the original purchase price and then sell the property at your desired price. However, this may lead to a financial loss for you.

Question 11

Why do I need to pay for buildings insurance if the property is "owned" by the bank?

Accepted Answer

It is the responsibility of the "tenant" to arrange adequate buildings insurance for the property. Buildings insurance is a legal requirement when taking out a finance agreement on property and ensures that you are adequately insured for buildings, contents or both.

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