How the Bank of England’s Base Rate Cut to 4.5% Affects Islamic Home Finance and Home Purchase Plans

The Bank of England has reduced its base rate to 4.5%, impacting homeowners, landlords, and investors across the UK. While traditional mortgage holders will see direct effects, those using Islamic home finance—such as Home Purchase Plans (HPPs)—may also be affected.

Islamic finance follows Sharia-compliant principles, meaning HPPs do not charge interest (riba). Instead, they operate on co-ownership and rental agreements, making them structurally different from standard mortgages. However, many Islamic banks and providers still use the base rate as a benchmark when setting their profit rates.

If you have an Islamic Home Purchase Plan or are considering one, understanding how this rate cut impacts your payments is crucial.

What Is the Bank of England Base Rate?

The Bank of England base rate is the interest rate it charges banks and lenders when they borrow money. It influences borrowing costs, including mortgages, personal loans, and business finance.

Islamic home finance does not involve interest, but banks and finance providers often use the base rate as a benchmark when setting the profit rate on HPPs.

If the base rate falls, this can lower the cost of financing for Islamic banks, which may then pass these savings to customers. However, each provider will set its own policy, so it's important to check how this affects your specific plan.

Why Has the Bank of England Cut the Base Rate?

The 0.25% rate reduction comes in response to several economic factors:

✅ Lower Inflation: UK inflation has been falling, meaning less pressure on interest rates.

✅ Economic Growth Concerns: The UK economy has struggled, so lower rates can encourage spending and investment.

✅ Global Economic Conditions: Central banks worldwide have been adjusting rates to stabilise markets.

You can read more about this decision on BBC News and The Guardian.

How Does the Base Rate Cut Affect Islamic Home Finance?

Islamic Home Purchase Plans (HPPs) are structured differently from traditional mortgages. There are three main types:

1️⃣ Ijara (Lease-to-Own): You pay rent to the bank while gradually buying shares in the property.

2️⃣ Musharaka (Partnership): You and the bank co-own the property, and you buy more shares over time while paying rent on the bank’s share.

3️⃣ Murabaha (Cost-Plus Financing): The bank buys the property and sells it to you at a higher price, repaid in fixed instalments.

Since HPPs do not charge interest, changes to the base rate do not automatically impact payments in the same way as conventional mortgages. However, many Islamic banks benchmark their profit rates against the base rate to remain competitive.

Potential impacts:

✅ Profit Rates May Drop – Some banks could lower their rates, meaning lower monthly payments for customers on variable-rate HPPs.

✅ New HPP Deals May Become More Affordable – Lower rates may make it cheaper to enter a new Islamic home finance agreement.

✅ Fixed-Term HPPs Remain Unchanged – If you are on a fixed-term HPP, your profit rate will stay the same until the term ends.

✅ Variable or Tracker HPPs Could Change – If your HPP is linked to the base rate, your payments may decrease.

Each Islamic bank has its own pricing strategy, so it's important to check with your provider.

Islamic Banks and Their Response to the Base Rate Cut

Different Islamic finance providers take different approaches. Some adjust their profit rates in line with the Bank of England’s base rate movements, while others set their rates independently.

Here’s how key players typically react:

Islamic Finance Provider	Linked to Base Rate?	Likely Impact
Al Rayan Bank	Yes	Potential decrease in variable rates
Gatehouse Bank	No	Rates may remain stable
HSBC Amanah	Partially	May adjust pricing for new customers
UBL UK	Yes	Possible reduction in monthly payments

Tip: Always check with your finance provider to understand how their pricing structure works.

Should You Consider Remortgaging Your Islamic Home Finance Plan?

If the profit rate on your HPP remains high, it may be time to explore a new deal. Islamic home finance providers review their rates periodically, and some may offer more competitive deals following this base rate cut.

Key factors to consider:

✔ Early Repayment Charges: Does your current provider charge a fee to switch?

✔ New Profit Rates: Are other banks offering better rates following the base rate cut?

✔ Your Financial Situation: Is switching to a new provider financially beneficial?

It’s always best to compare your options before making a decision.

Impact on the Housing Market

Lower base rates can make home finance more affordable, which often boosts property demand. Recent reports show that UK house prices have risen by 0.7%, reaching new highs (Financial Times).

For buyers using Islamic finance, this could mean:

• More competition in the property market.

• Higher property prices due to increased demand.

• A chance to lock in a better HPP deal before rates rise again.

• What Should You Do Next?

• If you have an Islamic Home Purchase Plan, here’s what you can do:

📌 Check with Your Bank – Find out if your provider is adjusting profit rates.

📌 Compare Home Finance Deals – Other Islamic banks may offer better pricing.

📌 Consider Refinancing – If rates are lower elsewhere, switching could save you money.

📌 Stay Updated – Future rate cuts (or hikes) could affect home finance costs again.

Conclusion

The Bank of England’s base rate cut to 4.5% may lower the cost of Islamic home finance for some customers, particularly those on variable-rate Home Purchase Plans. However, not all Islamic finance providers adjust their pricing based on the base rate.

If you’re looking to remortgage or apply for Islamic home finance, now could be a good time to explore your options.

For personalised advice, consult an Islamic mortgage specialist to find the best Sharia-compliant financing solution for your needs.

Disclaimers

Your home or property may be repossessed if you fail to keep up repayments or debts secured against it.

You have have to pay an early repayment charge to your existing lender if you refinance early.