Want to buy a home but can’t get what you need from a traditional mortgage? Have you considered a Home Purchase Plan? Home Purchase Plans (HPPs) have been known in the Muslim community for some time due to their partnership structure that allows the financing to be interest-free and Shariah-compliant. Recently, HPPs have become increasingly popular with non-Muslim buyers looking for an ethical, affordable alternative to a traditional mortgage. In this article we’ll explain how a Home Purchase Plan works, its differences and similarities to other mortgage types, and how HPPs could fill the void created by the end of Help to Buy.
What is a Home Purchase Plan?
A Home Purchase Plan is a Shariah-compliant way to buy a property, often referred to as an Islamic mortgage or a halal mortgage. However, people of all faiths – and none – are discovering the benefits of an HPP. Shared equity products are growing in popularity because as house prices outstripped earnings, the way banks’ judged affordability remained the same. Mortgage offers typically hover around four-times income. The end result of this has been more and more first-time buyers struggling to afford a home. Intermediaries have also noticed the trend and are looking to HPPs as a solution to address the affordability gap.
How is a Home Purchase Plan different from a traditional mortgage?
Rather than loaning funds to purchase a property, and charging interest on that loan, with an HPP, the finance provider and customer jointly buy the property. Each party owns the stake they have bought. For example, if the buyer pays £10,000 and the bank pays £90,000, the buyers owns 10% of the house while the bank owns 90%.
The customer then pays a monthly ‘rent’ payment to the finance provider, often a bank. The bank remains the registered owner for itself and the customer. As with a traditional mortgage, if all payments have been made at the end of the finance term, full ownership of the property transfers to the customer.
There are two main types of HPP:
- Rent and acquisition: similar to a Repayment Mortgage. In this version, each monthly ‘rent’ payment acquires a small portion of the bank’s share of the property. Over time, the customer buys all of the bank’s share and takes full ownership of the property at the end of the finance term.
- Rent only: similar to an Interest Only mortgage. Here, 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.
Is this the same as a shared ownership scheme?
There are some key differences between a Home Purchase Plan and a shared ownership mortgage. One major advantage of an HPP is that when buyers increase their stake in the property, the amount they pay is based on the value of the house when it was purchased.
With shared ownership schemes, the amount paid is based on the current market value which, as we all know, could be a lot higher than when the agreement was made. This is a big bonus for buyers using an HPP.
Also shared ownership schemes tend to have more restrictions around property choice, with new-builds being the norm. So shared ownership schemes are best suited for people open to sourcing their home from a particular development while HPPs are better for those who are keen to buy off the open market.
Advantages of an HPP
Many people consider a Home Purchase Plan to be a more ethical alternative to the traditional mortgage. An HPP is often offered by an Islamic bank, who won’t deal in interest. Instead, everything is equity-based. You’re also avoiding your payments financing the arms trade, alcohol or gambling.
Also, some HPPs are available to people who can’t get what they need from a mainstream mortgage. HPP providers often have different criteria and affordability calculations to high street banks. So if you’ve not received the mortgage you want from a traditional bank, you might get the financing you need from an HPP provider.
Home Payment Plan – a good replacement for Help to Buy?
The Help to Buy Equity Loan was a government scheme to help buyers secure a new-build property with a 5% deposit. It offered customers the option to borrow 20% of the purchase price (or 40% in London) interest-free for five years. Although the scheme hasn’t been without controversy, it undeniably supported people to afford a place of their own.
HPPs have many of the benefits of the Help to Buy scheme, which is no longer available. In fact, HPPs have a significant advantage over Help to Buy because you are not restricted to new builds and can buy off the open market – now it’s up to you to choose between that charming Victorian terrace and a shiny new build home.
##How does StrideUp compare to other HPP providers?
We don’t like to blow our own trumpet, but at StrideUp we know we have one of the best HPP products on the market. Here are four reasons our customers choose to buy their home with StrideUp:
- Security – rent payments are stable and subject to less frequent reviews in comparison to other Home Purchase Plans.
- Affordability – we offer up to 6.5x income where circumstances allow for it, boosting StrideUp customers’ affordability 20% over many high-street lenders.
- Accessible – at StrideUp we allow smaller deposits, lower minimum finance amounts and lower purchase prices relative to some competitors.
- Inclusive – our criteria are catered to people who fall outside the mainstream so we have greater flexibility in terms of deposits, income sources, residency and more.
Want to find out more?
We’re here to help! StrideUp’s range of Home Purchase Plans could boost your buying power and help you buy the home of your dreams. For a no-obligation chat, call a friendly StrideUp adviser today on 020 3875 3585.