Over the past five years or so, shared equity schemes – both governmental and private – have sprung up all over the UK (and the rest of the world). As Western Muslims currently face the unappetising choice between relatively expensive Islamic mortgages (in countries where they exist) on the one hand, or going for a straightforwardly haram conventional mortgage on the other, shared equity schemes are a promising alternative.

However, there are a number of key factors, from an Islamic perspective, to bear in mind when thinking about these schemes.

But first, what do we actually mean by ‘shared equity schemes’?

What are these schemes?

In a nutshell, shared equity schemes are a structure through which you, the homebuyer, will buy a percentage (let’s say 25%) of the house, and the government/scheme provider will own the other 75%. You pay rent on the 75% and slowly buy the 75% as well.

There are a number of variants of these schemes, and I am simplifying hugely with the above example. However, I will mention a significant variant: the equity loan scheme that the Share-To-Buy Government programme offer (https://www.sharetobuy.com/help-to-buy), as this is a very large version of the scheme many people will encounter. In this, the Government give a loan of a certain amount to the homebuyer to help fund the deposit. The homebuyer then has to pay back that £x. For 5 years there is no interest charged on that £x, but after that interest is charged.

There are a number of government-backed schemes all over the UK that vary in their terms. Many schemes outside of London aim to regenerate a shabby area of a town or city and are fairly affordable, and often you can get hold of some (or negotiate with them) to not have to take out an interest-bearing mortgage for your deposit. However, in London, it is almost certain that you will have to take out a mortgage just to pay 25% of the value of the house.  (However, there may be an option even here – more on this below)

However, we are seeing an increase in offerings of private, for-profit, shared equity schemes that are not in collaboration with the Government. They are not necessarily marketed at the Muslim audience per se, however what they are offering is entirely Islamic. One example is https://www.strideup.co/, and I would be interested to hear of other equivalents out there. What companies like this do is match up investors (in this case, lay people, not institutions) with people who want to buy a house. So Fareed wants to buy a house and has money for a 25% deposit. Strideup will help Fareed by arranging for the 75% to be bought by investors. More about these companies in the next section looking at the pros and cons.

What is good about them?

Shared equity schemes are principally equity-based transaction at heart and this is entirely Islamic. Many of them are actually purer forms of the versions Islamic banks offer. The rent they charge is pegged to market rates as opposed to LIBOR (though, as I have explained in previous blogs on Islamic mortgages, pegging to LIBOR is not actually that big a deal), many of the schemes share the burden of buying the property and insuring it, whereas an Islamic bank will not, and one can get access to high quality accommodation at a fraction of the up-front payment.

Further, some schemes don’t even ask you to buy the rest of the house off them. So as a cheap way of getting access to a house it is great, and your outgoing doesn’t take a big hit either.

Finally, as mentioned above, there is a degree of governmental support involved on the Government-backed shared equity schemes, and as such, the property can be cheaper/easier to buy overall than otherwise.

With the Strideup-type companies, one gets the benefit of being in a purely Islamic contract, sharing in the costs (e.g. insurance, repairs) with the other co-owners, and knowing that at the point of sale, investors will share in the risk/reward of the house price going up/down.

What to watch out for

  1. Taking out a mortgage on the 25% – Islamic banks don’t offer that right now

Islamic banks do not currently offer mortgages on shared equity schemes. The precise reasons are unknown to me, but I speculate that it is likely to do with the house not being in the name of the bank and so the legal structure deployed by the Islamic banks would not work.

This means that if you live in an area with high house prices, you can’t really go for a mortgage to pay the 25% using a deposit – other than saving the amount up in cash.

  1. Paying interest on the equity loan – even if nominal

In a nutshell, if you’re paying an interest fee, then this is problematic. However there are certain schemes where the interest is in line with inflation or nominal for the first five years. Any equity loan where the interest is pegged to inflation would be Islamically acceptable to many scholars (e.g. a rate of around 1-2% currently – and where the wording in the contract stipulates that the rate varies according to an inflation measure e.g. CPI). An equity loan that is nominal for the first five years – is still interest and so not allowed. However if you could negotiate with the provider to change the wording to “charges” or “fees” for the first five years, and you are confident you can pay back the equity loan within the first five years, then this is likely okay (though I accept there are other views on this matter and would be happy to discuss this further in the comments below). My reasoning is that this is identical to the credit card situation where you pay your balance in full every month, and credit cards are widely accepted by scholars to be acceptable to use in this manner.

The reason why it is okay to change “charges” to “fees” and say that is Shariah-Compliant, is that a lot of the time the “charge” here  is arbitrary and not in any way interest-based. It is simply worded that way as contract law/solicitors who write contracts are programmed to use “interest” (again happy to debate below).

There may also be the potential to liaise with the following organisations in an effort to get the government to provide a Shariah compliant alternative to the equity loan:

http://www.financingshariaenterprise.co.uk/

https://www.startuploans.co.uk/sharia-compliant-finance/

Both of these organisations are the Shariah-compliant arms of the Start Up Loans scheme the Government launched a few years back. While this isn’t the same scheme as the Help-to-Buy and Share-to-Buy schemes, these companies may be able to help in providing the necessary contacts within the relevant departments in order to set up something equivalent for the house purchase schemes. Clearly the British Business Bank (the Government-owned bank that sponsors the start-up loans) has Shariah-compliant finance experience, and so this avenue should be explored further.

Even if nothing comes of it, you’d be doing a service to the Muslim community by confirming either way.

  1. Islamic banks can often be cheaper – and more secure than private shared equity schemes

The thing with the new private shared-equity schemes is that as they are such a fledgling industry, they cannot yet compete with Islamic banks (and certainly not conventional mortgage providers see this previous IFG article making a similar argument for Islamic banks) on rates. They work at market rate rents – and so they vary from place to place, but will usually hover around 4-4.5% of the value of the house. However, usually, in the long run, the mortgage provider – Islamic or conventional – can beat them on price.

These companies also have to have exit strategies to allow investors to take profit. That could be a problem for you if you buy a house and then in 5 years’ time you have to sell up if the company cannot source other investors to replace the ones exiting. Of course you wouldn’t make a loss or have a rushed sale – as investors would also lose out then – but still, if you are buying a house for the long-term, this uncertainty might be something you don’t want to live with.

Conclusions

Fundamental to your approach to shared equity schemes is really doing your homework and finding out the precise structure, who owns what, and pays what, when. Then if there are any issues, do not be afraid to negotiate with the scheme/government/company to amend bits and pieces to make it Islamically compatible.

However, when done well, shared equity schemes really can be an affordable and Shariah-compliant step onto the property ladder.

Good luck – and let me know your own experiences. With the right structures and processes in place, shared equity schemes could not only be a viable Islamic mortgage alternative, but also a really good way for young people to get on to the property ladder.

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16 Comments. Leave new

  • Muhammad Abdul Wahhab
    May 31, 2017 1:19 pm

    Salam,

    Jazakallah for this article – it really has given me some confidence in the route that I am looking to buy a property for myself and my family inshaAllah (May Allah make it easy for us Ameen).

    I came across this company called Heylo Housing Limited (yourhome.org.uk) and have been communicating with them frequently regarding purchasing our property. Based on your previous blogs regarding Islamic Mortgages and corresponding Islamic fatwa regarding this I have found the following:

    – Rental rates are based on inflation (not interest rates) and they give a tabular sheet with the cost of the rent per month (so I know how much it’ll be – therefore the sale is valid [if I am not mistaken])
    ‘Your Home payments are linked to inflation (not interest rates) meaning they should more closely match your household income over the medium and long term. This rent starts at 4.89% and increases with the Retail Price Index (RPI) plus 0.75% each year. If RPI is zero or negative your rent will increase by 0.75%.’
    – Shared ownership scheme allows profit for the buyer. For example, if I buy the property at market rate of 300,000 and own 20% (I paid 60k) and should I decide to sell the property at 400,000, I get 20% of that 400,000. Furthermore, if you sell it for more than you initially bought it for, you get a percentage of that difference (I can’t find the page for that information currently but I have been told that on numerous occasions)

    The ONLY THING that has put me off is the following:
    I asked for a sample contract for the shared ownership lease that they would provide us should we decide to go along with the purchase with them. There is a section within the contract which is titled ‘Interest’ and it basically says that if we are late on rental payments, they will charge us interest on that late payment. I have been advised that we should not be dealing with companies who actively deal with interest even if they don’t tell us and I have read in previous blogs that you have said that if a company deals with interest without the purchaser’s knowledge then it is halal for us but haram for them (correct me if I am wrong).

    My question or rather what advice would you give me in this case? Do you think that they are just using the word ‘interest’ because it is the normal phraseology used in this country? Or could it be that it is just a ‘late payment fee’? Just so you know, they have told me that they will buy the property outright at an agreed price with the money that they have from investors etc. If that is the case, does it mean that it is not an interest based late payment but rather just a late fee because it is dealt with internally (i.e. they’ve not borrowed money from another bank it is their own money)?

    Some clarification would be much appreciated. And jazakallah for setting up this blog – although you do not preach to be like Sh. Haitham al-Haddad, I appreciate knowing a brother with a finance and economic background can lay out and simplify the facts and help the reader come to their own conclusions.

    Reply
    • Ibrahim Khan
      June 3, 2017 4:14 pm

      salam brother – this sounds fine. The interest clause is standard in the UK unfortunately and pretty much every contract requires this. If you can however get them to rephrase that is better.

      Sounds like an interesting company – I’ll take a look!

      Reply
      • Salaam Br Ibrahim,

        Jzk for the article above.

        Did you manage to take a look at the scheme offered by Heylo Housing? If so, what are your thoughts?

        Ws

        Reply
        • Ws Muhammed,

          They look fine. They don’t require a mortgage and seem like an equity only offering.

          However do read the fine print and watch out for any interest bearing loans that some of these shared equity schemes sometimes try to get you to take out by the back door!

          Reply
      • Muhammad Abdul Wahhab
        August 31, 2017 9:02 am

        Salam Br Ibrahim

        I just thought I’d update you since I asked this question.

        I managed to speak with Shaykh Haitham Al-Hadad (which for your readers’ benefit you can do by booking an appointment through the Islamic Council of Europe). I showed him the contract and its concept.

        He had done some research of his own with his team and his main concerns were the following:

        1) where does the company get its funding from?
        2) is the person buying the shares obliged to buy more shares in the future?

        1) the funding this company gets is a mixture of government funding via pension schemes (which is a riba scheme) and the rest is private investment. Now his concern of course is the addition of the pension scheme funding in this ‘pot’. He managed to speak to someone I have a direct link with and he had said the private investment accounts for 70% while the remainder is the pension scheme. Shaykh then asked what is the ratio of how much of riba money would be used towards buying the property? He said that it could be 0. Because it accounts for about 30% of the entire pot there is a possibility that it may not even be used.
        2) no. With this scheme you are not obliged to buy more shares they just recommend you to so your rent doesn’t continually to increase to the point where it becomes unaffordable. Essentially they say if you want to live in this house forever then it is better for you to buy more shares but you are not obliged to nor is it a contractual obligation.

        My previous concern was regarding the interest clause but Shaykh said that it could be ignored provided you do not fall into it. Meaning pay the rent on time!

        There were moments of quiet though because Shaykh was very surprised about this. From a business prospective he was trying to ascertain how is this company benefitting from this type of scheme. In any sale (and please clarify if this wrong) there should be some profit out of it else if your always breaking even or making a loss then you’re not going to do well.

        After an hour meeting with him he said Bismillah I can go ahead with this and Alhamdulillah it has worked out for us – we have found a property we like and are going through the legal process as of now.

        I spoke to the Shaykh and asked him to perhaps look more into the Shared Ownership schemes because they are popping up more and more in recent days. If it is something the Muslims can utilise while staying true to our beliefs and not comprimising them then it is something that the people must know about.

        Please forgive me if I have made any errors in my account. Allahu Musta’an!

        Reply
  • Assalamu Alaikum.

    Can I please get the email id of brother Abdul Wahhab? I am also trying to go through the same route.

    Thanks.

    Reply
    • Ws Iqbal,

      For the benefit of others looking at this comment, we have dealt with this privately and facilitated communication with the consent of all parties. Others wishing for introductions to other people within comments can get in touch with us via the Contact Us page and we can try to facilitate.

      Reply
  • Salamu Alaikum,

    First of all, thanks for the post. Brother Muhammad Abdul Wahhab, I was thinking of Shared ownership and came across your comments.. My question is, how did you proceed with the mortgage part of things? Did you go though islamic banking or cash? I hope you don’t mind me asking.

    Thanks
    F

    Reply
  • Salam Alaikom

    Jazak Allah for the article and discussion I found it to be really useful. I have been researching this avenue for a while and also came across Hey-lo. It really comforting to see the brother’s success alhamdolilah. Just wondering about the feasibility of buying a house from them in its entirety in the long term. What with house prices rising is this possible or would you forever be playing catch up? If anyone would be able to direct me to how I could figure this out I would be grateful!

    Many Thanks
    Cleo

    Reply
  • Masha Allah very informative. May Allah make it easy for all of us who are in a similar situation. All the best to Brother Abdul and JazakAllahkhair to all who contributed. Reading these blogs has given me hope that one day InshaAllah I’ll be able to find something similar and get onto the property ladder. I will also be looking at Heylo shortly.

    Reply
  • Sorry to hit this old thread what bothered me slightly was the suggestion that we should use alternative word for ‘interest’ in the contract documentation without effecting any other change. Whilst I can understand why this suggestion is made, but all it does is further increase the distrust that a lot of people have about Islamic finance being just a window dressing of riba.

    Reply
    • Ibrahim Khan
      July 2, 2019 2:06 pm

      re-reading this old article and my current view is that you should aim to get the wording changed, but more importantly, you should double-check and ensure that the fees/charges that you have to pay are not just interest, and are in fact a consideration for some work on the part of the equity provider.

      Reply
  • Can you please address the likes of yielders? basically crowdfunding property, assuming the property is fully cash-funded, what could be deemed problematic?

    Reply
    • Ibrahim Khan
      July 2, 2019 2:08 pm

      Thank you for your feedback – we’ll shortly be releasing a detailed review on Yielders.

      Reply
    • Mohsin Patel
      July 4, 2019 4:17 pm

      Review in the pipeline iA! From a sharia perspective, it is certified as being sharia-compliant.

      Reply

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