Islamic Mortgages Home Purchase Plan Explained | No Interest Or Early Repayment Charges?

Introduction

Welcome back to Let’s Talk Money and Mortgages. Today, Gemma is joined by Issachar, a trained accountant, mortgage broker, and founding director at WIS, with over 10 years of experience and 5.5 years in Islamic banking.
We’ll be discussing Islamic mortgages, including what they are, lender criteria, processes, and tips for borrowers.

What is Islamic Finance?

Q: What is Islamic finance?
A (Issachar):
In Islam, dealing with interest is prohibited. Conventional banking is heavily interest-based, involving lender-borrower relationships.
Islamic finance avoids “money-for-money” transactions and instead uses:
Trade-based models – buying and selling arrangements
Partnership models – joint ventures or profit-sharing arrangements
Banks act as fund managers, investing depositors’ money (called investors in Islamic banking) in partnership arrangements rather than lending for interest.

Are Islamic Mortgages Cheaper?

Q: Are Islamic mortgages cheaper than regular mortgages?
A:
They are not directly comparable because conventional mortgages charge interest, while Islamic mortgages do not.
Generally, Islamic solutions may be slightly more expensive due to:
Higher cost of funds
Different risk profiles
Reliance on depositors’ money rather than external cheap funding

Islamic Mortgage vs Home Purchase Plan

Q: Is there a difference between an Islamic mortgage and a home purchase plan?
A:
The Home Purchase Plan (HPP) is the most common Islamic solution in the UK.
It uses the diminishing Musharakah concept:
The bank and customer jointly buy a property (e.g., 80% bank, 20% customer).
The customer gradually buys the bank’s share over time while paying rent on the portion still owned by the bank.
Ownership increases over time; the bank’s share diminishes.
Legal ownership is joint, unlike conventional mortgages where only the customer owns the property.

Remortgaging in Islamic Finance

Q: Does remortgaging exist in Islamic finance?
A:
Yes. Deals usually have fixed periods (e.g., 2–5 years).
Customers can renegotiate or move to another bank, creating a new partnership.

Buy-to-Let Options in Islamic Finance

Q: Are there buy-to-let options under Home Purchase Plans?
A: Yes, two options:
Non-diminishing Musharakah:
Customer pays rent for the bank’s share, which does not diminish.
At the end, the customer can buy the bank’s share.
Diminishing Musharakah:
Customer gradually buys the bank’s share over time, similar to residential HPP.
Stamp duty applies as usual.

Eligibility and Availability

Q: Are Islamic mortgages only for Muslims or UK citizens?
A:
No. Islamic banking is open to anyone, regardless of faith.
Many clients are non-Muslims seeking the financial benefits of these products (e.g., no early repayment penalties).
Some UK banks also offer Islamic solutions to expats and non-residents, making it accessible worldwide.

Unique Features of Home Purchase Plans

Q: What makes Home Purchase Plans unique?
A:
Legal structure – Joint ownership of property with shared risks and rewards.
No early repayment penalties – Unlike many fixed conventional mortgages.
Flexibility – Customers can buy more units if they pay off part of the HPP early, after discussion with the bank.

Savings in Islamic Banking

Q: How do savings work in Islamic banking?
A:
The most common scheme is Mudaraba:
Customers invest money; banks act as fund managers.
Profits are shared based on a predetermined ratio (e.g., 50% bank, 50% investor).
Returns are variable, unlike guaranteed interest in conventional banking.
Banks use invested money in trade or partnership-based schemes (e.g., Musharakah, Ijara).

Process and Timeline

Q: How long does it take to get a Home Purchase Plan?
A:
Takes longer than conventional mortgages due to:
Different legal processes
Need for client advice and explanation
Typically 2–3 weeks longer than conventional mortgages.

Q: Is a solicitor required?
A:
Yes. Legal processes are different, so using a specialist solicitor familiar with Islamic finance is recommended.

Closing Advice

Islamic mortgage solutions are specialist products; timelines and processes differ from conventional mortgages.
Always consult a qualified mortgage introducer or advisor.
Reminder: A mortgage is secured against your home or property. It may be repossessed if you do not keep up with payments.