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Sharia-law-compliant home finance and purchase plans

Sharia-law-compliant home purchase plans help you buy your home in a way that doesn’t involve paying interest. They’re complex products and there can be a big difference in what firms offer, so consider getting professional financial advice to help you decide. You also need to get legal advice to make sure your right to live in the property is protected.

How do home financing or purchase plans work?

Sharia-compliant home purchase plans come in three slightly different forms:

  • Ijara
  • Murabaha
  • Diminishing Musharaka

They all work differently, so it’s important to understand the differences before choosing.

Ijara

Ijara – also known as Ijarah – is a term referring to the leasing element of a home purchase plan.

With an Ijara plan, the monthly payments you make – which are part rent and part capital (and part charges).

They’re then used to finance the purchase at the end of the term.

As a result, your share of the property remains constant throughout the arrangement – until the day the lender’s stake is bought out.

At the end of the term, as long as you have kept to the terms of the agreement, you’ll have bought out the plan provider and be the sole owner of the property. This might take some time though.

Murabaha

The lender buys the property and sells it on to you straight away at a slightly higher price. The value of the property, length of mortgage and the amount you put down as a deposit will help determine the price you pay for the property.

Murabaha requires an initial deposit, normally at least 20% of the purchase price – but the property belongs to you from day one.

The repayments are fixed for the length of your mortgage and you can repay the loan in full at any time with no penalty. 

This type of arrangement is not a home purchase plan but rather a home financing arrangement and as such could be classed a regulated mortgage contract assuming it meets the condition of a first legal charge over the property 

Diminishing Musharaka

Diminishing Musharaka – also known as Musharakah – is essentially a co-ownership agreement.

This means both you and the bank or building society own the property together, with separate stakes. So each repayment – which is part rent and part capital (and part charges) – is used to buy the bank’s shares in the property over time.

As your stake grows, the bank’s stake shrinks. This reduces the amount of rent you have to pay for use of the bank’s share of the property.

Deposit, fees and costs

Deposit

You’ll typically need a deposit of at least 20% of the property to qualify for a Sharia-compliant home purchase plan.

For example, if the property you want to buy is valued at £200,000, you might need to put down at least £40,000.

Providers of home purchase plans can also use the government-backed Help to Buy scheme.

Under this scheme, a property’s ownership is split between the customer and the bank. After buying a portion of the property with their initial deposit, the purchaser of the property pays regular instalments to the bank. This covers rent for the portion they don’t own and an acquisition payment.

In this way, a customer gradually buys the property from the bank and eventually becomes the sole owner.

Fees and costs

When working out what you can afford remember to budget for the following:

  • survey
  • buildings insurance
  • Stamp Duty – payable at the start
  • lender’s valuation fee – this will vary depending on the property value
  • legal fees – you’ll need to pay for two solicitors; one to act on your behalf and the other to represent the lender.

The firm should provide you with a tariff leaflet detailing all fees and levies it will charge you – see the later section ‘Information you’ll get’.

Work out what you can really afford

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It’s important to think carefully at the start about how much you can afford – not just for the upfront costs, but also to pay each month.

Keep in mind your costs might go up in the future, as the rent will usually be reviewed every six months.

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Where can you get a Sharia-compliant home purchase plan?

The following banks currently offer these plans:

Getting advice on the right plan for you

Since April 2014, home purchase plan providers must offer you an advised service.

This means they must ask you questions to understand your financial circumstances and only recommend a suitable product for you.

Providers must also assess whether a conventional mortgage would be appropriate for you.

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Information you’ll get

Information about the firm’s service

The home purchase plan firm, whether a provider or adviser, must explain the main messages about the service they’ll give you.

This must include:

  • whether you’ll have to pay for their service and, if so, the fees they charge
  • the range of products on offer, making it clear if there are any limitations. A provider, for example, only offers its own plans. But a broker can offer a wider range. You’ll typically be given the names of the firm’s Islamic scholars. These are the people certifying the firm’s services comply with Islamic law. If you have any doubts about the Islamic nature of the product or services a firm is offering, speak to your Imam or an independent Islamic scholar. It’s important to ask for this information in writing.

Facts about the home purchase plan

In any sale of a home purchase plan you’ll be given the following documents:

  • Key facts risks and features of this home purchase plan – this explains the main risks, features and benefits of the plan.
  • Key facts financial information statement – this sets out the overall cost of the plan and how much you’ll pay each month.
  • Offer letter including an updated key facts financial information statement – you’ll get this when the firm offers you a home purchase plan.

Protect yourself

The Financial Conduct Authority requires firms offering home purchase plans to protect your interests. But there'll be limits to what the provider can do.

For example, if a firm goes out of business, or sells its share of the property to someone else, you might risk losing your share of the property and your right to live there.

It’s important to get independent legal advice to make sure your interests are properly protected. For example, a solicitor can protect your right to stay in the property by ensuring the lease with the home purchase plan firm is registered with HM Land Registry.

To check that your lease has been registered, download leases and other documents relating to the property (for a small fee):

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MoneyHelper is the new, easy way to get clear, free,
impartial help for all your money and pension choices.
Whatever your circumstances or plans, move forward with MoneyHelper.

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Looking for us? Now, we’re MoneyHelper

MoneyHelper is the new, easy way to get clear, free,
impartial help for all your money and pension choices.
Whatever your circumstances or plans, move forward with MoneyHelper.

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