Insights

Shariah-compliant finance explained

Charles Haresnape, Chief Executive Officer

Home Purchases Plans (HPPs) follow the principles of Shariah finance, which is considered to be based on the principles of fairness. This rules out interest on the basis that money shouldn’t be generated from money and instead should be put to work to generate a return.

Whilst HPPs are not yet universally understood, their popularity is growing. This is partly due to the transparency of the products and also because of the growing number of UK providers.

What’s the difference?

When a property is bought with HPP, the bank buys the property in partnership with the customer. There is technically no borrowing.

Instead of levying interest, the bank charges the customer rent on the portion of the property they don’t yet own. The customer also pays an additional amount each month to acquire the bank’s stake in the property over the finance term.

So the proportion of the property owned by the bank shrinks over time, as does the rent the customer pays. At the end of the term, the bank transfers complete ownership of the property to the customer.

Increasing property equity

One benefit of HPPs is that customers can increase their stake in the property at the value that applied when they purchased it. This is greatly preferable to conventional
shared-ownership schemes, where occupiers must buy additional equity at the current market value.

In addition, Home Purchase Plans also have a number of other benefits compared to traditional mortgages. For example, HPPs have no early repayment charges, excluding legal fees, should the customer wish to refinance or simply repay in full from other sources - offering unrivalled flexibility - and rent payments on an HPP are only reviewed quarterly for customers, if they are outside of a fixed term agreement, the equivalent of a fixed-rate mortgage.

Buy-to-let and expats

Gatehouse Bank has offered HPPs since December last year and has seen significant demand. This kind of Shariah-compliant ‘mortgage’ can be very useful for landlords too, with Buy to Let Purchase Plans offering the same benefits as HPPs.

A key part of our strategy is to target under-served markets, and we know that’s key for many brokers too. Our human underwriting approach, means that we have been able to assist homebuyers and landlords who have found it hard to arrange financing and proceed with a property purchase.

This has included members of the expat community and international residents, who want to acquire a UK home or invest in UK property but have been rejected by other providers because of rigid and arbitrary application criteria.

Home Purchase Plans and Buy to Let Purchase Plans are considered mainstream in many developed nations and we believe the market opportunity is significant for UK residents, expats and overseas buyers.

This blog was featured on Mortgage Solutions.