WHAT IS A HOME PURCHASE PLAN?
Many people looking to buy a home might think that a conventional mortgage based on interest payments is the only way to secure the funding. However, there is a great alternative to the traditional mortgage loan, and that is the home purchase plan.
Home purchase plans offer a viable alternative to those people who want a regulated option that is not based on interest payments.
For Muslims, this means that they can still secure the money to buy property without breaching Sharia rules about financial transactions. What is even better is that home purchase plans in the United Kingdom are regulated.
HOME PURCHASE PLANS AND ISLAM
From an Islamic perspective, home purchase plans are a great alternative to conventional mortgages as they do not involve the cost of interest payments.
Home purchase plans in Islam are based on risk sharing and profit and loss sharing.
Home purchase plans are sometimes known as Islamic mortgages. However, there are some key differences between Islamic mortgages and home purchase plans that you need to be aware of.
Islamic mortgages and home purchase plans are both compliant with Sharia law. However, they do have some key differences.
Some of main differences between home purchase plans and Islamic mortgages include the following:
- payments - the payments are structured differently in home purchase plans. With an Islamic mortgage, payments can fluctuate. Under a home payment plan the repayment cost is fixed at the outset.
- ownership - with Islamic mortgages the bank and the customer jointly own the property. With home purchase plans, the bank buys the property outright and sells it back to the purchaser at a profit.
- risk - when it comes to an Islamic mortgage, both the bank and the customer share the risk of the purchase. With a home purchase plan, the bank takes on the risk of the purchase.
Home purchase plans replace the charging of riba, or interest, with a form of shared investment.
The bank and the individual both own a share in the property and over time the individual makes repayments towards the bank's share of the property until they own it outright.
Currently, more and more providers are offering a home purchase plan service to their consumers.The result is that the demand for home purchase plans is steadily increasing.
Let's set out exactly how home purchase plans work:
- the financial institution purchases the property using their own funds
- the purchase is made on behalf of the purchaser/ customer
- the purchaser makes pre-agreed payments to the bank and these payments include a profit margin for the bank
- the regular payments made by the purchaser are used to effectively buy out the bank
- when all the payments have been made, the purchaser owns the property outright
There are several differences between home purchase plans and traditional mortgages.
The main difference to note is that in home purchase plans, instead of the bank lending money to a potential purchaser, the bank will instead purchase the property themselves in partnership with the purchaser.
Instead of paying interest to the bank, the purchaser pays a 'rental' payment to the bank. This payment is made at regular intervals as per the terms of the contract with the bank, and the payment is made for the proportion of the property the bank owns.
Home purchase plans need to avoid any kind of interest payment to be compliant with Sharia law and the Islamic finance rules relating to real property purchase transactions.
TYPES OF HOME PURCHASE PLANS
There are two main types of home purchase plan:
- Rent only - this type plan is one where the customer makes payments that only cover the rental element of their proportion of the property. At the end of the contractual term, the customer will then be required to make a lump sum payment to acquire the bank's share of the property.
- Acquisition and rent - this type of plan requires the customer to make a monthly payment that covers the rent and also a payment to the bank for their share of the property. What this means is that at the end of the term, the customer will have made enough payments to own the property outright and buy-out the bank.
For anyone looking for a suitable home purchase plan, it is essential that you have all the relevant information you need.
Make sure the home purchase plan you are interested in is regulated. You also need to ensure it is properly Sharia compliant.In the United Kingdom, home purchase plans should be regulated by the Financial Conduct Authority (FCA).
Sharia compliant home purchase plans aim to ensure both parties in the transaction are treated fairly.
THE BENEFITS OF HOME PURCHASE PLANS
There are many benefits of having a home purchase plan. It is not only Muslims who are interested in these types of plans, but also those investors who want payment plans without accruing or paying huge sums of interest.
Other advantages to having home payment plans including:
- they are a flexible arrangement between the individual and the bank
- they do not normally incur early payment charges and fees
- they provide clarity for purchasers with regard to the overall purchase price, obligation and payments
- customers can make additional payments
- rents are reviewed periodically
- the bank takes on the risk of the purchase
THE GROWTH OF HOME PURCHASE PLANS
Although home purchase plans are popular with Muslims who want a Sharia compliant way of being able to afford accommodation, many people are now considering home purchase plans.
It is important to note that if you are considering a home purchase plan, then you need to check the website of the financial institution to make sure that their products are Sharia compliant. Speak to financial advisors if you have any concerns.
Not all home purchase plans are the same. They each have different structures so you should always consult with a financial expert before making any decisions.