Home purchase plans: Islamic home finance

A home purchase plan is a way of buying a home in the UK without paying interest. The official definition describes it as "a method of purchasing a property by way of a sale and lease arrangement that does not require the payment of interest"¹. Instead of lending you money and charging interest, a provider buys the property, or a share of it, and leases it back to you. You pay rent on the share the provider owns and, over time or at the end of a set period, you buy the provider's interest until you own the home outright².

The arrangement exists mainly for people whose faith prevents them from paying interest. The Financial Conduct Authority (FCA) notes that the definition "is primarily directed at arrangements of this kind", meaning arrangements designed to comply with Islamic principles, although nothing in the rules limits a home purchase plan to Muslim buyers: anyone can take one out². In everyday use the product is often called an Islamic mortgage or a Shariah-compliant mortgage, and the two best-known UK providers are Gatehouse Bank and Al Rayan Bank.

The legal shape matters for your protection. A home purchase plan is a regulated product in its own right, separate from a conventional mortgage, and firms that sell, arrange, advise on or administer one must be authorised by the FCA². A firm that advises you to enter a plan must take reasonable steps to ensure the plan is suitable for your needs and circumstances³.

How a home purchase plan works: buying the home with a provider

The starting point is a partnership of sorts between you and the provider. Under the FCA's definition, at the time the plan is entered into the provider buys a qualifying interest in UK land, or an undivided share of one. You, the home purchaser, are obliged to buy that interest over the course of the plan or at the end of the specified period. During that period you or a related person must be entitled to use at least 40% of the land as a dwelling, and must intend to do so².

In practice the plan usually works like this. You choose a home and contribute a deposit, which buys you an initial share. The provider buys the rest. You then occupy the home under a lease and pay rent on the share you do not yet own, alongside payments that gradually acquire the provider's share. Each acquisition payment increases your share and shrinks the rented share, until nothing is left and you own the home outright. The structure resembles the one used in shared ownership, where a buyer makes two payments each month: a mortgage payment for the share they own and an occupancy charge for the share they do not⁴.

Two features distinguish this from renting. First, you are obliged to buy the provider's interest: this is a purchase plan, not a tenancy you can simply walk away from, and the plan documents will set out what happens if you cannot keep up the payments. Second, your entitlement to occupy is part of the plan's legal definition, so the provider cannot treat you as an ordinary tenant whose lease can simply be ended at the close of a fixed term, in the way a landlord may stop a tenancy when a fixed term runs out⁵. If you are weighing this against a conventional mortgage, the site's guide to how a mortgage works sets out the interest-based alternative side by side.

Rent instead of interest: what makes a plan Shariah-compliant

Conventional mortgages charge interest, which many Muslims cannot pay on religious grounds. A home purchase plan replaces the interest charge with rent. The provider owns a real share of the property for as long as you have not bought it, and charging rent on property one owns is treated as permissible in a way that charging interest on money lent is not. The FCA's guidance is explicit that the definition was designed with these arrangements in mind, following comments by HM Treasury when the underlying legislation was introduced, while confirming that the rules do not restrict the product to any group of buyers².

The two structures most often used are Ijara and diminishing Musharaka. In an Ijara plan the provider buys the home and leases it to you, and your payments combine rent with the acquisition of the provider's share. In a diminishing Musharaka plan the provider and you co-own the property as partners, and your payments buy out the provider's partnership share over time. Both fit the same regulatory definition: a sale and lease arrangement in which you are obliged to buy the provider's interest and entitled to occupy the home while you do so¹.

Because rent replaces interest, the economics behave differently in one useful way. Interest is charged on the whole amount you owe, whereas rent is charged only on the share the provider still owns. As your share grows, the rented share shrinks, so the rental element of your monthly payment tends to fall over the life of the plan. The acquisition element, by contrast, is what transfers ownership to you. The overall cost of the plan is therefore driven by the rent level the provider sets, the length of the plan and the fees, and you are entitled to the full figures before you sign.

Acquisition and rent: what the monthly payments are made of

Each monthly payment under a home purchase plan has two parts. The first is the acquisition payment, which buys a further slice of the provider's interest in the property. The second is rent, charged on the share the provider still owns. The FCA's definition requires that you buy the provider's interest over the course of the plan or at the end of the specified period, so the acquisition element is built into the arrangement itself, not optional².

The closest mainstream parallel is shared ownership, where a buyer makes two payments each month: a mortgage payment for the share they own, and a monthly occupancy charge for the share they do not⁴. A home purchase plan has the same two-part shape, but with an important difference: under shared ownership you may be able to stay at your original share, whereas under a home purchase plan you are obliged to keep acquiring until you own the whole property².

What each element costs depends on the plan's terms. The rent is set by the provider and is typically fixed for a period, then reviewed. The acquisition payments are usually level across the plan, so your total monthly payment is often similar each month, with the balance between rent and acquisition shifting in your favour as time passes. Because the provider must ensure the plan is suitable for your circumstances if it advises you³, and because the plan is a long-term commitment, the figures you are given before signing should show how the payments change over the whole term. Ask for the full schedule, including what happens at each rent review, and compare it with the ESIS illustration a conventional lender would give you.

Deposit and affordability

As with any home purchase, the deposit buys your initial share and the provider funds the rest. The share the provider funds is expressed as a percentage of the property's value, in the same way that a conventional mortgage's loan to value is: a 20% deposit means a maximum 80% loan to value⁶. The site's guide to loan to value explains how the ratio is worked out and why a bigger deposit tends to mean better terms.

Provider terms set the limits. Gatehouse Bank's published home purchase plan terms give a maximum finance to value of 80% for purchase and refinance, and a maximum finance to income multiple of 6.00 times single or joint income for applicants with income of £75,000 and above, with the finance to value up to and including 80.00%. The same provider states it can consider up to 6 times income depending on income, deposit size and overall affordability. These are one provider's terms, not a market-wide rule, and other providers set their own limits.

Affordability is assessed before you are offered a plan. A firm that advises you must take reasonable steps to ensure the plan is suitable, which includes whether the payments are manageable for you³. The checks resemble a conventional mortgage assessment: income, outgoings, credit history and the stress of possible payment increases. The guide to how much can I borrow covers how lenders and providers approach income multiples, and mortgage in principle explains the indicative offer you can get before you find a property.

Who can get a home purchase plan

Anyone can apply: the rules are deliberately not limited to Muslim buyers, even though the product was designed for people who need to avoid interest². What matters is that the plan fits your circumstances. The FCA's sales standards state that a home purchase plan will not be suitable for a customer unless it is appropriate to that customer's needs and circumstances³, so a firm advising you has a duty to check the fit, not just process the sale.

Government schemes can interact with home purchase plans in ways worth knowing. The First Homes scheme requires purchasers to use a mortgage or a home purchase plan, if required to comply with Islamic law, to fund at least 50% of the discounted purchase price⁷, so the product is explicitly recognised in scheme rules. The Help to Buy mortgage guarantee scheme's rules were amended to take account of the different structure of a home purchase plan⁸, and the scheme's property price cap is £600,000⁹. If you are buying with any government scheme, check its own eligibility rules as well as the provider's.

Circumstances that need extra care include self-employment, credit problems and buying with family. The guides to mortgages for self-employed people, getting a mortgage with bad credit and joint borrower sole proprietor arrangements explain how these are handled in the conventional market; home purchase plan providers apply similar scrutiny. A gifted deposit, money given to a homebuyer to help them buy a property¹⁰, can be used, but the provider will want to see the source of the funds.

Fees and charges

The fees around a home purchase plan are largely the same as those around any property purchase. As part of buying a house or flat you may also need to pay a solicitor, an independent surveyor, a mortgage arrangement fee, a Land Registry fee and Stamp Duty¹¹. Buying a home involves immediate costs such as legal fees and Stamp Duty, followed by ongoing costs such as the payments themselves, rates, repairs and service charges¹². In England and Wales the buyer also arranges and pays for searches and surveys¹³.

The land tax depends on where you buy. In England and Northern Ireland, most buyers pay no Stamp Duty on the first £125,000 of a purchase price¹⁴. First-time buyers can pay less or nothing: on a house of £292,000, a first-time buyer's Stamp Duty costs would be zero¹⁵. If you are buying an additional property, a 5% surcharge applies in England and Northern Ireland¹⁶, but if HMRC views you as replacing your main residence, even though you own an interest in another property, standard rates apply¹⁶. Scotland has Land and Buildings Transaction Tax and Wales has Land Transaction Tax, each with their own bands, and the guides to mortgages in Scotland and mortgages in Wales cover them.

Provider-specific charges sit on top. These can include an arrangement or plan fee, a valuation fee and charges for varying the terms of the plan later, and the provider must set them out before you sign. The guide to mortgage fees and charges explains the conventional equivalents, which home purchase plan fees generally mirror. Budget for the one-off costs and the ongoing costs together: the deposit and Stamp Duty are one-offs, while the payments, insurance, rates and utilities continue for as long as you own the home¹⁷.

Fixed rental periods and what happens when they end

Most plans fix the rent for a set period, commonly between two and five years, in the same way that a fixed rate mortgage fixes the interest rate. During the fixed period your rent does not change, which makes budgeting predictable. When the period ends, the rent is reviewed and can rise or fall, and you will usually be offered new terms for a further fixed period or a variable arrangement, much as a conventional borrower moves onto a standard variable rate when a fix ends.

The review is the point at which the plan's cost can change materially. Rent levels, like mortgage rates across the market, are influenced by the Bank of England base rate: when the base rate falls, borrowing costs tend to fall with it, and commentators have noted the greater likelihood of further base rate cuts feeding through to mortgage pricing¹⁸. A plan with rent reviewed against prevailing rates will move in the same direction, though not necessarily by the same amount or at the same time.

Your protection at a review comes from the rules around varying a plan. Advising on and arranging a variation of a plan's terms are regulated activities², and a firm that advises you to vary an existing plan must take reasonable steps to ensure it will be suitable afterwards³. So you cannot simply be moved onto new terms without the process being handled properly. Before a fixed rental period ends, ask the provider what the new rent and payments will be, compare them with what a remortgage or a move to another provider would cost, and read the guide to what to do when your fixed rate ends, whose logic carries across.

Paying off early: lump sums and early payment charges

Many plans let you pay lump sums to acquire more of the provider's share early, which shrinks the rented share and so reduces the rent element of future payments. Because varying the terms of a plan is a regulated activity², any change to your payment schedule has to be arranged properly, and the provider may set a minimum lump sum or an administration charge. The guide to making overpayments explains how overpayments work in the conventional market, and the same principles apply: paying down early reduces the total cost, but the mechanics depend on the plan's terms.

The main cost to check is the early redemption charge. If you pay off the plan early, whether with a lump sum, by selling the home or by moving to another provider, the plan documents may impose a charge, in the same way that equity release plans may carry early repayment charges that should be checked before choosing a plan¹⁹. The charge, how it is calculated and how long it applies vary between providers and between plans, and the only reliable source is the plan's own terms, given to you before you sign.

A few points are worth checking in the documents. Ask whether the charge is a percentage of the amount repaid, of the outstanding share or of the original amount, because the cash size differs sharply between them. Ask whether the charge steps down over time, as many conventional early repayment charges do. And if you are moving home rather than paying off, ask whether the plan can be ported to a new property, because transferring an existing arrangement may cost less than redeeming it and starting again.

From application to offer: how long each stage lasts

The timescales resemble a conventional purchase. Buying a home usually takes around two to three months from start to finish, with a number of steps along the way¹⁷. Gatehouse Bank states that for its home purchase plans it is usually 2 to 4 weeks from the initial application to an Offer of finance being issued, and then usually another 12 to 16 weeks from receiving a signed Offer of finance to legal completion. Those are one provider's published timescales and other providers may differ, but the shape of the process is common: application, checks, offer, then legal work.

The stages run in order. First you get an indicative figure for what you could borrow, the equivalent of a mortgage in principle. Then you find a property, and the provider arranges a valuation and survey. The provider then assesses affordability in detail and issues a formal offer. Once you accept it, solicitors handle the searches, the land transfer and the land tax, and the plan completes when the purchase does. The guide to how to apply for a mortgage walks through the same sequence for a conventional loan.

Delays usually come from the legal work rather than the finance. Chains of buyers, leasehold properties and slow searches stretch the completion stage, and the provider's offer may have a limited life if completion drags. Keep your documents to hand, respond to the provider's requests quickly, and ask your solicitor early what they need from the provider, since the plan's paperwork is less familiar to some conveyancers than a standard mortgage.

Leasehold flats and new builds

Whether you can buy a leasehold flat or a new build with a home purchase plan depends on the provider and the property, so ask before you commit to either. There is nothing about a lease that rules a property out: leasehold flats are routinely bought with government equity schemes, which recorded 48 completed purchases of leasehold properties in Wales in 2023 to 2024, all of them flats²². But providers assess lease length and ground rent individually, and a short lease affects both what you pay and what you can resell: if you buy on a 125-year lease and sell after 15 years, the buyer gets a 110-year lease²³. The guide to leasehold properties explains what lenders look for.

New builds raise their own questions. Some schemes exclude flats entirely: under Help to Buy Wales, homes split into flats are not included, and homes previously occupied by an owner or tenant may not be purchased²⁴. Home purchase plan providers make their own decisions, and a new build may need a different valuation approach because the purchase price is often fixed before the home is built, in what is known as buying off-plan²⁵. The guide to new-build homes covers the risks that apply to any buyer, including the gap between price and value on completion.

If the property is a flat, budget for the extras. For flats or maisonettes, the buyer or leaseholder must also pay an annual service charge¹¹, and that cost continues regardless of how the purchase is financed. Ask the provider early whether it lends on the type of property you want, and ask what valuation it requires: a down valuation on a leasehold or new-build property can derail a purchase at the last minute, and the guide to challenging a down valuation explains your options if it happens.

How home purchase plans are regulated and where to get help

Home purchase plans are fully regulated products. Advising on a plan, arranging one, administering one and entering into one as the provider are all regulated activities under the FCA's rules². Three types of arranging activity are regulated, as are notifying you of changes in payments due under the plan and taking steps to collect or recover payments². One boundary is worth noting: acquiring rights, obligations or interests in land from the provider is not itself a regulated activity for you as the purchaser, so the regulation sits with the firm, not with you².

Where a contract meets the requirements of both a regulated mortgage contract and a home purchase plan, it is treated as a home purchase plan only²⁶. That rule matters because it tells you which rulebook applies to your complaint or your dispute: the home purchase plan rules, not the conventional mortgage rules. The FCA's sales standards add a further protection: a firm that advises you to enter into a plan, or to vary one, must take reasonable steps to ensure the plan is, or will be, suitable for you³.

If something goes wrong, complain to the provider first, using its complaints process, and then to the Financial Ombudsman, which can look at complaints about regulated financial services, including how a home insurance claim is settled²⁷. The government's guide on how to buy a home lists which organisations can help²⁸. If you are struggling with the payments, help exists and taking it early matters: the guides to mortgage arrears, the Mortgage Charter and your rights and protection set out the support available, and free, impartial money guidance is available from MoneyHelper. Before you apply, the guide to mortgage advice explains the difference between getting advice and going direct, and the sub-page mortgage or Islamic home purchase plan? compares the two routes directly.