Don’t like the sound of a conventional mortgage? Neither do we. If you want to purchase a home, there are some great alternatives out there to secure funding.
In this article, we’ll cover three alternatives to a mortgage and six different places where you can find them.
The three alternative categories to a traditional mortgage we’ll cover are:
- Home Purchase Plan (HPP).
- Shared ownership.
Muslim or non-Muslim – these are certainly worth taking a look at. But first, why look for an alternative?
Why not a conventional mortgage?
Don’t get me wrong, a conventional mortgage could be great, and you could find a good deal. However, consider the following points:
- You might not be eligible for a mortgage. However, you may be under a shared ownership scheme (as discussed below).
- For Muslims, conventional mortgages are haram due to the interest.
- For non-Muslims, you may believe interest to be unethical.
- With an HPP for example, you won’t be charged a penalty if you want to make an early repayment of your mortgage.
- Islamic banks are arguably safer than mainstream banks as they don’t engage in prohibited activities under the sharia, such as derivatives and exotic instruments trading.
We have a full table comparing the pros and cons of an Islamic mortgage.
Ok, now let’s get into the first of our three alternatives – the HPP.
1) Home Purchase Plan (HPP)
What is an HPP?
An HPP is a type of mortgage product designed to prevent the mortgagee from paying interest.
There are three different types of HPPs:
- Ijara aka “rent-only” (lease),
- Diminishing Musharaka (partnership); and
- Murabaha (profit).
How does an HPP work?
the most common HPP is the Diminishing Musharaka
- It’s a co-ownership agreement.
- The bank will own most of the house (e.g., 80% of it) and you’ll continue to pay ‘rent’, buying further equity, until you have 100% ownership. Your share of ownership grows and theirs will shrink.
- What makes this halal? The bank shares the risk of ownership with you. In other words, the bank is holding 80% of a property on its accounts, rather than an £80k debt. Yes there are a few finer technicalities around this of course – but in a nutshell that is what is going on.
Where can I get an HPP?
There are two places to find an HPP:
- An Islamic bank
You can find a HPP plan at any Islamic bank. These are banks that do not believe in dealing in interest. Rather, everything is equity-based. That means, a lot of the dodgy credit card and extortionate activities that some elements of the mainstream lending world engage in – are avoided.
The two main Islamic banks are Al Rayan and Gatehouse. You can compare between them here.
Strideup is the new kid on the block and we expect it to go live in the first half of 2021. We don’t know what their pricing will be like but we expect it to be competitive with the Islamic banks.
Strideup is regulated and we’ve known the guys behind it for a number of years now. A reliable, quality outfit.
Now let’s move to our second alternative of a conventional mortgage – shared ownership.
2) Shared Ownership
What is shared ownership?
Many people can’t afford to buy a home on the open market. It’s an expensive commitment.
A ‘shared ownership’ scheme means you buy a share of a property and pay rent to a not-for-profit organisation for the remaining share. There are also for-profit organisations that do this, as discussed next.
This is a great option for those on a low income, little capital or no help from The Bank of Mum and Dad.
Where can I get this?
There are a number of ways to own a house through a shared ownership scheme, including through the government.
Note on the below options: Heylo Housing is only live approximately once a year. Wayhome and Primary Finance are not live yet. The government schemes require you to meet their criteria which is discussed below.
Heylo Housing is an alternative to a mortgage. It provides a shared-ownership model where you can buy back as much (or as little) of your house as you like.
Generally, they are most suitable for those who are otherwise struggling to get an Islamic mortgage with a mainstream Islamic bank – because Heylo’s rates tend to be more expensive and not worth it if you can go for an Islamic bank instead.
From a sharia perspective they’re great, as they don’t lock you into buying back the Heylo portion of the house, and as such there isn’t a “debt-like” element to the structure like there arguably is with a standard HPP.
Wayhome, formerly Unmortgage, provides a shared-ownership model. They’re well-funded like Heylo and we’re excited to see what they come up with when they finally launch.
Primary Finance is a start-up that is still going through the FCA regulatory process. We’re very excited about them – provided they secure the financing they need to be able to execute on their vision. Check out our podcast with them here. In a nutshell, they too are an alternative to a mortgage and provide a shared ownership structure – but they believe that they can offer such a structure at Islamic bank (or lower) rates. Big aims – but if they achieve it, I’ll be switching for sure!
Local Council or Developers
You may be able to get financial help from the government to buy a home. This is through shared ownership of a home through a housing association. You buy a share of your home (between 25% and 75%) and pay rent on the rest.
You can buy a home through shared ownership if your household earns £80,000 a year or less (or £90,000 a year or less in London) and any of the following apply:
- you’re a first-time buyer
- you used to own a home, but cannot afford to buy one now
- you’re an existing shared owner
For more info, check the Gov website.
A quick search and you will find properties that are on the market under shared ownership schemes.
Now for our final alternative to a traditional mortgage – crowdfunding.
What is it?
This is similar to the shared ownership scheme, but with some key differences.
Here the buyer purchases his share of the property. The investors who are a number of people that come from the public have crowdfunded money to also own a share. The investors will receive rent for the part they own from the buyer.
In contrast, in the Shared Ownership scheme, you’ll just have a buyer and one developer/council.
Where can I get this?
CrowdToLive is a property crowdfunding platform that does exactly this. They are FCA regulated.
A Shared Ownership scheme typically requires a minimum purchase of a 25% share of the property. This will still be too high for many people. CrowdToLive allows the buyer to invest with only a 5% share, making it much easier for people to get on the property ladder.
If you’d like to invest with CrowdtoLive – they offer around 5% yields per annum and you can register here.
They are still very early in their journey so probably one to keep a tab on – but what they’re doing is very intriguing and interesting.
For a big investment like a house purchase, you should look at every avenue. Hopefully some of the above will give you food for thought.
If you are hungry, we’ve got plenty of further reading on our website.
To summarise, the three alternative categories to a traditional mortgage we covered were:
- Home Purchase Plan (HPP).
- Shared ownership.
The six places where you can find them are StrideUp, Wayhome, Primary Finance, Heylo, an Islamic mortgage and CrowdToLive.