Shariah-compliant finance explained
This article was originally published in August 2019 and updated in May 2023 to reflect changes in Gatehouse Bank’s product offering.
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.
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.
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 nations and we believe the market opportunity is significant for UK residents, Expats and overseas buyers.