Paul Stockwell (pictured) is chief commercial officer of Gatehouse Bank
When it comes to mortgages, most borrowers think that choosing between fixed, variable and tracker is about as exciting as it gets.
But there is an interesting alternative to traditional home loans that is growing in popularity and offering a different approach for homebuyers and landlords.
Home Purchase Plans (HPPs) are sometimes referred to as Islamic mortgages but the term is technically misleading.
Whilst the outcome is the same, in that both result in the customer owning the property, there are a number of important differences.
Shariah-compliant finance strives to be fair to the consumer, and, in the context of HPPs, replaces the charging of interest with a shared investment and lease.
The principles that form the bedrock of Shariah finance are that money should be put to work to produce a return, instead of generating money in and of itself.
There aren’t very many UK banks offering HPPs, but the products are growing in popularity among consumers, and not just the Muslim community.
How does it work?
HPPs contrast from conventional mortgages in several major ways.
Instead of the bank lending money to the customer to buy a property, the bank purchases the home in partnership with the customer.
Rather than paying interest, the customer pays the bank rent on the proportion of the home they don’t yet own.
There are two types of Home Purchase Plan:
- Rent & Acquisition – Where the proportion of the property the bank owns reduces over time as each monthly payment includes a payment to the bank to acquire a small portion of the bank’s share. Over time, the customer acquires all of the bank’s share and takes full ownership of the property at the end of the finance term.
- Rent Only – Customer payments only cover the rental payment on the proportion of the property they do not own. At the end of the finance term the customer will need to pay a lump sum to acquire the bank’s share.
Home Purchase Plans also enjoy huge flexibility, they do not have early payment charges, apart from legal fees, even if the customer wishes to settle their finance during a fixed-term agreement – the HPP equivalent of a conventional fixed rate product.
In addition, rental rates are reviewed quarterly and following the fixed term period customers can make additional acquisition payments each quarter.
Since Gatehouse Bank launched its initial Home Purchase Plan offering in December 2018, we have seen growing demand from UK, Expat and International homebuyers.
Our human approach to underwriting has helped many customers who were unable to gain support from traditional, high volume providers.
We believe Shariah-complaint banking has a bright future in the UK, we have extended our offerings during the first half of the year and I expect that we will continue to broaden our proposition during the remainder of 2019 and beyond.