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Home purchase plans
What is a home purchase plan?
Home purchase plans are also known as 'Islamic mortgages'. They serve the same purpose as a conventional mortgage – they provide consumers with a means of buying a home – but they are structured in a way that makes them acceptable under Islamic law.
In a conventional mortgage, a financial institution lends money to a consumer to help them purchase a property and the financial institution makes its money by charging interest on the sums lent.
As it is forbidden to pay or receive interest under Islamic law, a home purchase plan is one of the ways Muslims can finance the purchase of their own home whilst keeping to their religious principles.
The common characteristics of home purchase plans
- A financial institution buys a property chosen by a consumer and becomes the owner.
- The consumer enters into an agreement to buy the property from the financial institution at the original purchase price either by paying in full at the end of, or paying by instalments during the course of, a specified period.
- The provider and consumer enter into a rental agreement, giving the consumer the right to occupy the property throughout the specified period.
- Once all payments have been made at the end of the specified period, the financial institution transfers ownership of the property to the consumer.
Don't you already regulate 'Islamic mortgages'?
We already regulate the Murabaha method of buying a home, which is the other way of buying a home acceptable under Islamic law.
Under this method, the provider buys the property and immediately sells it on to the consumer for the original price plus an agreed profit margin. The consumer pays the higher price on a deferred payment basis in line with a fixed repayment schedule and to secure repayments, the provider takes a first charge over the property.
This method falls within the definition of a regulated mortgage contract and so has been regulated by us since October 2004.