Commenting on the launch, Sultan Choudhury, Chief Executive Officer, IBB said:
“Having worked directly with the government to adapt its Help to Buy mortgage guarantee scheme to include HPPs, IBB is delighted to be the first provider to take advantage of the initiative. We know from experience that some customers, especially first time buyers, struggle to raise a deposit greater than 10% of the property value but can afford the necessary monthly payments. IBB’s new product has been designed to meet their needs and we are very pleased to be putting the reality of home ownership within the reach of many more individuals.”
Offering a rental rate of 4.99%, fixed until 31 December 2017, IBB’s new Sharia compliant HPP provides finance up to 90% of funds to value (FTV), meaning that customers can secure home finance with an initial contribution of just 10% of the value of the property. This is half the amount previously required by the Bank.
The HPP is expected to appeal to customers of all faiths as it offers flexibility and a more transparent fee structure compared to many conventional mortgages; IBB does not charge any penalties for terminating the HPP agreement early, and there are no hidden fees. The £999 administration fee of the new 90% FTV HPP represents the Bank’s standard fee of £399, which is proportional to the work undertaken by IBB to process the arrangement, plus a fair contribution towards the amount that the Government charges IBB to be part of its Sharia compliant Help to Buy scheme.
IBB’s new HPP marks an important milestone for Islamic finance in the UK as it puts ethical and affordable home finance within reach of many more people looking to get on, or move up, the housing ladder. Under the rules of the Scheme, it is not available to those wishing to purchase a second property.
As a Sharia compliant product, IBB’s HPP differs from a mortgage where the customer borrows money from a lender, which is then repaid with interest. A HPP uses the Islamic finance principles of co-ownership with leasing, where IBB and the customer buy the property as partners and the customer pays rent on IBB's share in the property. At the end of the term, when all acquisition payments have been made and the finance has been settled, ownership of the property transfers fully to the customer.
The home finance provided by IBB is generated from ethical activities, and not from businesses that are considered unlawful under Sharia law, i.e. companies that deal in interest, alcohol, gambling, pornography, speculation, tobacco, arms and other commodities contrary to Islamic values.
The Help to Buy: HPP guarantee scheme works in a similar way to the Help to Buy: mortgage guarantee scheme, but takes into account the different way that a HPP is structured. It enables Islamic banks to take a guarantee for their Home Purchase Plans where the consumer has an initial contribution of between 5% and 20%. The guarantee compensates the bank for a portion of net losses suffered in the event of default. This reduces their risk of offering home finance to consumers with a low initial contribution.
