Owning a home is a dream for many. However, for a variety of reasons this has been unattainable for many Muslims. For many in the west, a key obstacle is having a cost-effective and sharia-compliant way to help them finance the cost. This is the problem Primary Finance are trying to solve. We've previously done a podcast with them with you can check out here.
In this article, we will be proving an in-depth review of their offering as well as commenting on how they stack up against the competition. We have previously reviewed Al Rayan Bank's HPP product and Gatehouse too.
Here's what we will cover:
- What do they do?
- How does their product work?
- Is it sharia compliant?
- How much finance can they provide?
- How much is the rent?
- Are they live?
- Their investment product
- What happens if you can’t pay the rent?
- How do they differ from the Islamic banks?
- How do they differ from other non-bank home finance providers?
What do they do?
Primary Finance are a shared ownership alternative to traditional home financing products. They offer a debt-free way to help people purchase a home. Their mission is to develop such a product where no one will want debt-based finance anymore.
How does their product work?
The product operates as a partnership rather than a debt. This means you are not simply borrowing money from them to purchase a house. Rather you enter into a partnership agreement with them to jointly fund the purchase of a house.
You then pay rent on their share of the property. You can also buy their share over time to decrease the amount of rent you pay and eventually end up achieving full ownership.
You might be thinking “this sounds basically like any other Islamic mortgage or shared ownership product.” But the important point here is you are not obliged to purchase their share. It is entirely up to you.
Let’s work through an example of how this works:
- Adam wants to buy a house for £100k but he only has £20k available to use as a deposit.
- Primary Finance (and its investors) agree to contribute the remaining £80k and they purchase the house together.
- Adam now has a 20% ownership stake and Primary Finance own the remaining 80% of the house.
- Primary Finance agree to rent their share to Adam and thus every month Adam will pay rent on the 80% that he doesn’t own.
- Adam also can buy a portion of Primary Finance’s equity each month. If he makes their recommended equity purchase, Primary Finance give him a discount on the rent.
- As Adam increases his ownership stake of the house, the amount of rent he pays to Primary Finance will decrease.
- For example, if Adam purchases £1k of equity from Primary Finance (1% of the house cost of £100k), his ownership stake will increase to 21% and Primary Finance’s stake will decrease to 79%. He then only pays rent on 79% of the property and this continues to fall as he purchases more equity.
- Eventually if Adam purchases all of Primary Finance’s equity from them, he becomes the full owner and no longer has to pay any rent.
Is it sharia-compliant?
Yes. Primary Finance are using the diminishing musharakah structure which is the most common structure in the UK. We covered this in more detail in a previous article on Islamic home purchase plans which you can check out here.
Essentially, the product has been structured as a partnership where the risk and reward are shared between the two parties and there is no riba involved. Their sharia-compliance has been signed off by in-house scholar Sheikh Salman Hasan and has received endorsements from scholars such as Sheikh Haitham Al-Haddad from the Islamic Council of Europe.
How much finance can they provide?
Primary Finance require that you have at least a 20% deposit and have a finance limit of £300k per customer. You also need to be financing a minimum of £50k. They expect to be able to loosen these requirements as they grow and scale.
How much is the rent?
The rent they charge is based on the local property market rates. This is reviewed each year to ensure it is in line with any market changes. If your local market rental rates go up, then so will your rent payment. Conversely if the local market rates go down, so will your rental payment. They have a maximum cap on rent increases which they will communicate to you during your purchase. This gives you full visibility on the maximum you can expect to pay.
Primary Finance also provide a large discount on the rent if you make their recommended equity purchase. This discount could be anywhere between 20 and 50%. This is to incentivize you to eventually fully own your property which is what they are here to facilitate.
Our understanding is that, with the discounts, current rental rates are around 3.5%, which are roughly in line with what the two main Islamic banks offer.
Are they live?
Yes, their solution is live. However, because of the nature of their business they require a lot of up-front investment to help them finance houses.
This means currently there is a 5 year waitlist for their services – unless they can secure major investment from large institutions. To date they have financed around 20 deals, including some buy-to-let deals.
In the meantime, they do offer a way in which you can jump up the waiting list by a few years, which we’ll cover in the next section.
Their investment product
Primary Finance offer an investment scheme where you can invest your money with them helping to fund the purchases of homes. In return you get a share of the rent they collect.
If you invest certain amounts, you are also entitled to be fast tracked on their waiting list. The more you invest, the higher your position is on the waiting list. Their expected yearly profit rates are 0.9% for investments of £5k up to 1.1% for investments of at least £30k.
This isn’t a significant return and it is below the current inflation rate – but the full investment is not zakatable, so as a Muslim that is helpful.
From a risk perspective, as the investment is fully backed by property, it is not ultra high risk. However, as Primary Finance is a relatively young company, it is not fully known how things would play out if there was a big “run” on the bank – i.e. if lots of people withdrew their money all at once. This is a relatively remote risk though, and there is a period of 3 months before you can get your money back in any case.
The other consideration is that if renters decide not to pay up, then the rental cashflow dries up – this is not a “guaranteed” investment. With the equity buffer model (i.e. where renters can pay with their equity) that cash could dry up for up to a couple of years. This is obviously great for the home buyer, but in that time, our understanding is that the investor is relatively stuck.
And ultimately, after two years you would be reliant on Primary Finance chasing down the renter effectively to make them pay up or to force a home sale. A home sale is also not guaranteed to be at a profit either, though with property you would expect to retain most of your investment.
Sure, the repayment rates so far have been excellent, and it is very unlikely everyone will stop paying at once, but it is our duty to fully sketch out the investment.
What happens if you can’t pay the rent?
Naturally in life, sometimes difficult situations arise where someone may be unable to make their payments. In this case Primary Finance suggest that they can support you in two ways:
- Firstly, you are not obliged to buy Primary Finance’s share from them which reduces the burden on you.
- If you are really struggling and can’t pay the rent as well, you can use some of your ‘equity buffer’. This is the share of the property you already own and instead of rent you can sell some of your shares to them. This means you have a large equity buffer that can protect you during down times and save your home from being repossessed.
For example, let’s say your monthly rental payment is £500. If you are unable to pay in a given month, you could instead sell £500 worth of shares to them. This could keep you going for quite some time. Say you have £30k worth of equity in the house. You could go without paying rent for up to 60 months (60 x £500 = £30k). So it’s a great protection to have.
How secure are Primary Finance?
When you buy a property with Primary Finance, the property is owned by a special purpose company. This company is not owned by Primary Finance but by the customer and investors. This creates a degree of separation between you and Primary Finance, which protects you in case Primary Finance run into financial difficulties.
Practically, let’s think it through. If Primary Finance need to wind up, you have an ongoing deal with them, and they have investors who also have a deal with them. Investors would likely start exiting so Primary Finance wouldn’t be able to finance further homes.
However, the payments between you and Primary Finance are all one way – from you to them. So this relationship shouldn’t necessarily be affected in the short term.
However longer term, someone would need to take Primary Finance’s stake and/or the investors whose money is now stuck, would look to see if they can sell the underlying properties. Ultimately, this too shouldn’t cause you to lose any money, but it may mean that you end up selling earlier than you would have liked.
There are two elements to regulation – the home finance aspect and the investment aspect.
They aren’t currently regulated by the FCA, but this is not for a lack of trying. The FCA reviewed their product but decided that it doesn’t currently come over their remit. This is because there is no lending involved or debt creation. For more on this, listen to a webinar we hosted with Primary Finance where the question of regulation was put directly to them.
If the FCA do introduce regulation in the future, Primary Finance say they are prepared for this and already operate as if they are being regulated. In our view some form of regulation from the FCA would be welcome, both as a deterrent to any bad actors and to provide confidence to consumers.
As the shared ownership industry scales, we believe it will ultimately get regulated. We would expect fees to have to rise to meet with overheads at this stage.
On the investment side, Primary Finance work with a regulated entity – SI Capital – which signs off on financial promotions. However the full structure and payment flows here are not clear to us at this stage. We have also not had sight of any of the legal documentation (but would like to if someone has it!).
Right now, the product is not a regulated product. Whether or not the Primary Finance investment product comes under regulation is a matter for the FCA, but what’s for certain is that the extra comfort that comes with being authorised and regulated by the FCA would be very welcome for investors.
The investment is also not to be confused with an Islamic savings account, as these are FSCS backed (in case things go wrong you are guaranteed to get your money back up to £85,000).
How do they differ from the Islamic banks?
Islamic Banks such as Al Rayan, Gatehouse and Al Ahli offer Home Purchase Plans (HPP). But how exactly does Primary Finance’s offering differ from these HPPs?
- No debt (obligation to buy) - HPPs require you to buy their share no matter what, whereas with Primary Finance it is up to you if you choose to buy (although they strongly incentivise it through the rental discounts they offer). In our view this is primarily an academic difference – the vast majority of people get into a home financing to buy their home. From a fiqhi perspective this is very helpful though and takes it into completely unambiguously permissible territory.
- Not regulated – Primary Finance do not need to be regulated for their home product. Islamic banks by contrast are regulated by both the FCA and the PRA and therefore come with significant additional protections and oversight. FSCS protection on the investment product is one example, regulated mortgage protections are another for their Islamic mortgages.
- Loss sharing - If the property loses value, Primary Finance will share in the loss if you haven’t breached their terms and conditions. Whereas HPP providers will not share the loss and will only accept the original purchase price. This is very novel and commendable, but we’re keen to see actual live scenarios and what happens.
- Their equity buffer – As discussed previously, if you are struggling you can trade your shares for rent. You can’t do this with HPPs. This is again very novel and commendable but it does put a cashflow burden on Primary Finance. So if there ever was a credit crunch or recession and many people decided to stop paying their monthly payments, Primary Finance could come under material pressure to remain afloat.
- Deposit requirements – This varies depending on the provider and is constantly changing. Primary Finance’s 20% minimum deposit requirement is currently less than Al Ahli and Al Rayan (who require 35% at the time of writing) but more than Gatehouse, whose minimum deposit is just 5%.
- Clarity on pricing – Islamic banks are very clear on pricing and fees whereas, currently, with Primary Finance it seems a bit more bespoke and not as transparent. Whilst we appreciate their pricing model is more dynamic, we think it is very helpful if a clear and transparent analysis is given on this.
- Waitlist and capacity – The waitlist for Primary Finance is a lot longer than for Islamic Banks who have access to larger sources of capital currently. With Islamic Banks you can get an offer almost immediately whereas with Primary Finance it could take a number of years. Primary Finance to date has only done approximately 20 financings, while the banks have done tens of thousands.
- Pricing - Islamic Banks use conventional indices such as the Bank of England Base Rate (BBR) to price their products. Primary Finance however use local property market rates. With the rental discounts you can get from making acquisition payments, Primary Finance say their rate will be similar to that of Islamic Banks.
- Minimum finance value – During our webinar with Primary Finance, they shared that they require a minimum property value of £50k currently but this is a moving target that will change over time. In contrast, the current minimum finance amounts for the HPPs are £100k for Gatehouse, £250k for Al Ahli and £200k for Al Rayan.
- Stamp duty – Stamp duty must be paid upfront with HPPs but with Primary Finance they add it to the acquisition cost meaning you pay it off as you buy the rest of the property. However with HPPs you only have to pay stamp duty once. This is because banks get dual stamp duty relief. With Primary Finance, as things stand you will have to pay stamp duty again at the end if you obtain 100% ownership. However, they are working on trying to amend this. As it stands however, stamp duty is a very significant additional cost for home purchasers to keep in mind.
- No restrictions on acquisition payments – You can make acquisition payments whenever you want with no restrictions. For large amounts Primary Finance request that you abide by their notice period. The HPP providers do allow you make additional payments but have certain conditions such as a minimum acquisition payment (£4k for Al Rayan and £2k for Gatehouse) and you can’t do this during your fixed rate period.
- Forward visibility – Primary Finance will tell you the maximum rent you will have to pay over the course of your agreement. Whereas with other products you don’t have as much insight into what the rate will be in the future.
All things considered Primary Finance perform reasonably against Islamic Banks in many aspects however there are some key things to improve on as well.
A very important caveat to this comparison is that Islamic banks operate on a model where they issue several thousand Islamic mortgages a year, whereas the shared ownership space has only done hundreds since its inception, and Primary Finance only 20.
Therefore, in many ways, it is not a true like for like comparison until Primary Finance scales enough to be able to provide in the thousands of home financings.
How do they differ from other non-bank home finance providers?
The main alternative to Primary Finance in this space is Wayhome. Other non-bank home finance providers either offer an HPP (so the analysis would be similar as to above) such as StrideUp or a crowdfunding solution like that of CrowdToLive. Therefore, in this section, we’ll do a direct comparison between Wayhome and Primary Finance. For more information on Wayhome, check out this youtube video Ibrahim did on them recently.
- Choice of home – With Primary Finance you have a lot of flexibility to choose a home that suits you. Whereas for Wayhome, you must select a property from their pre-approved selection which narrows your options. The negative is the narrow choice but the positive is that you know the property won’t get rejected by them later – as can happen with an Islamic bank or Primary Finance.
- Acquisition limits – Wayhome only enable you to achieve 40% ownership with them due to tax reasons. You can then either continue as a part-owner and pay rent as a 40% shareholder or buy out the remaining 60%. Primary Finance allow you to achieve 100% ownership. This is a material weakness in the Wayhome product at this moment in time – though we do expect them to fix this in due course.
- Pricing - Primary Finance use local property market rates which can go up or down depending on the market. They do cap the maximum increase and have said that the average customer won’t see more than a 1 or 2% increase. Wayhome also start with local market rates but after that increase the rent in line with the Retail Price Index (RPI). This means your rent will go up with inflation each year. In years where inflation is high (which is what we expect for the near future), this could go up by quite a bit.
- Their equity buffer – Primary Finance’s equity buffer is an advantage. If you are facing financial difficulties, you can trade your shares for rent. With Wayhome they will try work with you for a payment plan. If this fails, they will offer to buy out your share of the property minus any owed rent. Failing that would lead to repossession talks.
- Property value – Primary Finance’s £100k minimum house value fares well here. Wayhome require houses to be worth between £250k and £500k.
- Minimum deposit – Wayhome accept deposits between 5 and 30%. For Primary Finance you would need at least 20%.
- Acquisition price – Primary Finance will sell their shares to you at the original price. Wayhome however will sell you shares at the latest market rate. So it could become more expensive to purchase their shares.
Wayhome is the better option for those with lower deposits. Their 5% minimum deposit could help many people get on the housing ladder who otherwise couldn’t. However for those who can save the 20% minimum deposit, Primary Finance may be the better option with favourable pricing and the ability to achieve full ownership (if you can wait your turn on their waitlist).
Primary Finance have a really interesting proposition with a product that truly captures the essence of the partnership structure.
There is genuine risk sharing and they believe their pricing is at Islamic bank rates or lower.
Their key challenge is obtaining enough investment in order to scale to become a truly viable mass-market solution, and to make sure that they are also scaling their regulatory, legal and tax structures accordingly.