Important Tips about Home Purchase Plans (Ijara n Musharaka)

Firms regulated by the FSA have to give you certain documents. Whenever you see the sign, this means you are being given information that’s important for you.

Keyfacts documents that firms must give you

You should get the following documents:

■about our home purchase plan services –
explains the service and the range of products firms offer, and, if appropriate, the names of the Islamic scholars they have consulted.

■risks and features of this home purchase plan
– will explain the key risks, features and benefits of the plan.

■financial information statement –
will give you the costs involved in the plan – ie the overall cost and how much you will pay each month.

■Offer letter
including an updated financial information statement – you’ll get this when the firm offers you a home purchase plan. Use this to make sure you’re getting the product you applied for.

Complaints

If things go wrong with a firm, you should take your complaint to the firm first. If you can’t resolve the problem between you and the firm, you may have access to the Financial Ombudsman
Service – see Useful contacts . The Ombudsman deals with complaints that cannot be resolved between you and the firm.

Compensation

If you are dealing with a broker who advises you or arranges the sale of the plan for you, and the broker stops trading, you may have access to the Financial Services Compensation Scheme.
The scheme provides a safety net for consumers.

Don’t forget
■A home purchase plan may be suitable for you if you want to buy your home in a way that doesn’t involve paying interest.

■You will bear the costs of two solicitors’ fees and you may pay more for a property valuation and building insurance.

■You won’t legally own your home until the end of the plan – this could be between 7 and 25 years.

■Home purchase plans are complex products, so make sure you get independent legal advice.

■If you want Islamic services, the about our home purchase plan services document will tell you which firms can offer them.

■Make sure you deal with a firm FSA regulates.

■Make sure a home purchase plan is right for you – there are other ways of buying your home.

Link to Previous article : Islamic Mortgages

Islamic Mortgage

How Islamic Mortgage Works? An example of how Islamic Mortgage Works

Suppose that there is a married Muslim couple with the surname Taj, who are looking for a house according to their Islamic faith.
Mortgages from British financial institutions are interest-based, something which does not comply with Islamic Sharia law. Islam has no objection to wealth creation, but says it must be based on partnerships and fairness where risks and rewards are shared.

In the eyes of Islamic scholars, interest is an excess payment from one party to another which is unrelated to the value of the goods traded.

Mortgage interest is therefore unacceptable because one party gains at the other's expense without any regard to the price paid for the home.
This means many Muslims in Britain find themselves in a difficult situation, trying to balance the core principles of Islamic equality with the realities of the British mortgage market.

In many cases Muslims conclude they have no choice but to reluctantly take out an interest mortgage - something Mr Taj's own parents did.

But Mr and Mrs Taj are among a growing number of young couples who want to turn to the two lenders in the UK offering Sharia compliant mortgages - the United Bank of Kuwait and the West Bromwich Building Society.
Once the Tajs find a house, the lender buys on their behalf and owns it outright.
Just as with an interest mortgage, the couple move in and begin paying instalments to the lender to slowly buy the home over many years.
But the difference is they also pay a rent to the lender who has effectively become their landlord.
The lender owns the property and receives a rent until the Tajs pay the final instalment.
In Islamic terms, the rent is not another name for interest: It is seen as a fair payment for use of the property rather than a charge for borrowing money.
There are a number of factors which make this more expensive than an interest mortgage. Firstly, the couple need a large deposit of 20% of the value of the home.
Secondly, because the process means the home legally changes hands twice, the Tajs will end up paying stamp duty twice, rather than once.
The couple have an added worry of trying to save enough to keep up with the rising London property market.
Hence, the borrower ends up paying more, but the Muslims who believe in their faith are prepared to pay more
So is there a demand for this type of mortgage?
"There's enormous interest in this subject among young Muslims. A lot of our friends are in the same situation," says Mr Taj.
"Some have managed to raise the money to take out an Islamic mortgage.
"A few of them have taken out interest mortgages because they feel it is the only choice they have, given the costs.
"I think they feel guilty about it but believed they had no alternative.
"It would make a real difference if there were more products on the market. Then there would be more choice for Muslims."

Link to Previous article : Home purchase plans and regulation - 2
This example is based upon a cast from BBC

Home purchase plans and regulation – 2

A home purchase plan may be right for you if you want to buy your home in a way that does not involve paying interest and that a number of scholars of Islamic law consider acceptable. But you need to think about several things, some of which are listed below.

Islamic services

If it is important to you that the firm you use offers Islamic services, check that it does. Firms we regulate must give you a document called about our home purchase plan services. The document must tell you the names of the scholars who have checked that the firm’s services comply with Islamic law.
FSA regulates the financial services provided by a firm – FSA do not regulate its compliance with Islamic law. If you have any doubts about the Islamic nature of the product or services a firm is offering, you should speak to your imam or an independent Islamic scholar.

How much finance do I need?

Home purchase plans are a long-term commitment so think about how much you can afford. For example, what would happen if your circumstances changed and you lost your job or had to take a drop in income? Also you can't be sure that your rent won't go up in future. If you can't pay your rent, you'll be breaking the terms of the lease.

Shop around

There can be a big difference in what is available from different firms, so shop around to:
 -- get all the information available from firms about their individual services and products; and
 find out about different rental rates on offer – for example, standard, fixed and discount rates – and the total cost of each one.

Use the keyfacts document called about our home purchase plan services to compare the service being offered by different firms and the keyfacts financial information statement to compare the cost of the products on offer

Getting advice

Home purchase plans are complex products. Make sure you get advice from a specialist adviser to help you understand them.
Firms we regulate and their agents must follow the standards we set when giving you advice. They should only recommend those home purchase plans that are suitable for your personal circumstances, based on the information you give them.

What are the risks

■We require firms offering these products to protect your interests. However, there will be limits to what the firm can do, so it’s important to get independent legal advice to make sure your interests are properly protected. Take the time you need to make sure a home purchase plan is right for you.

■You need to remember that the firm, not you, owns the property, and that you won’t legally own your home until the end of the agreement – this can be anything up to
25 years.

■During this time, if the firm goes bust, or sells its part of the property to someone else, unless your interests have been properly protected you may risk losing your share of the property and your right to live there.

■Make sure that the lease giving you the right to live in the property has been properly registered with HM Land Registry or you may lose your right to live there.

■As with any method of buying a home, you need to think about whether or not you will be able to continue to make payments if your circumstances change.

Additional Costs

Two solicitors will be needed – one to act on behalf of the firm and one to act on your behalf. You will have to bear the costs of both.

Because the firm is the owner of the property, you may also pay more for a valuation and buildings insurance than you would with a mortgage.

Features not included

Because of the way they work, home purchase plans may lack some of the features of an interest-based mortgage.

For example:
■Overpayments normally allow you to pay for your home more quickly. When you take out a home purchase plan you can only make overpayments when the rent is reviewed, and this does not reduce the term but the amount you pay each month. This means you usually won’t benefit immediately from overpaying each month as you could with a mortgage.

■A further advance of money is often used to pay for things like home improvements. Unlike a mortgage, you may not get a further advance on an existing home purchase plan.

■Payment holidays allow you to stop making payments for a time. This may be useful if you were to lose your job or take time off to look after a child, for example. You can’t usually take a payment holiday with a home purchase plan.

Check the information from firms to see what features they offer.

Link to Previous article : Home purchase plans and regulation - 1

Home purchase plans and regulation

What are home purchase plans?

Home purchase plans help you buy your home in a way that doesn’t involve paying interest.
So they may be of special interest to Muslims who want to buy a home in a way a number of scholars of Islamic law consider acceptable.

What does regulation mean for you?

Firms we regulate must meet set standards. Among other things, this means that firms must:

■have staff with the necessary skills and knowledge;

■give you clear information about the services they provide –and

■only sell you products that suit your needs and circumstances.

And if things go wrong with a firm FSA regulate, you may have access to schemes that deal with complaints and possibly compensation.

Always check that the firm you’re dealing with is regulated by FSA.

■You won’t pay interest with a home purchase plan.

■Keyfacts documents contain important information that you should read.

■Protect yourself – only deal with firms regulated by the FSA.

Home purchase plans work in the following way:

Step 1: You find the property you want to buy and agree the purchase price with the seller.

Step 2: You pay the home purchase plan firm a contribution towards the purchase price.

Step 3: The firm buys the property in its name.

Step 4: You enter an agreement to buy the property from the firm at the end of a fixed period (known as ‘the term’) at the same price as the purchase price paid by the firm.

Step 5: At the same time you enter the agreement with the firm to buy the property, you also take out a lease with the firm allowing you to live in the property during that fixed period.

Step 6:
You make monthly payments to the firm. Each payment is made up of a rental payment and a payment towards the purchase price of the property.

Step 7:
Once you have made all the payments to the firm, the property is transferred into your name and
becomes legally yours.

Two types of home purchase plan are currently available – the ijara and the diminishing musharaka.

1. The ijara

Under the ijara, the monthly payments you make towards buying the property are held by the firm and used to buy your home at the end of the agreement.



2. The diminishing musharaka

Under the diminishing musharaka, each payment you make towards buying the property buys a slice of the firm’s share. So the firm’s share in the property gets smaller while your share increases. As your share in the property increases, so the rent you pay for the use of the firm’s share will get smaller.


Ask the firm for full details of their home purchase plans to make sure you understand how they work. You can then choose which is best for you.

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