We have written extensively on Islamic mortgages at IFG (see here, here and here for example), but we have previously kept the discussion generic. In this article, for the first time ever, we exhaustively go through Al Rayan’s Home Purchase Plan ( the “HPP”) in particular.

We are confident that nothing as detailed as this has been done for the Al Rayan HPP. In this article we examine the legal, Islamic, commercial and practical aspects of the HPP informed by:

1. a close read of Al Rayan’s legal documentation;
2. a wide-ranging survey of Al Rayan customers; and
3. hundreds of discussions we’ve had with professionals, Al Rayan staff and scholars over the last few years. In short, this has been a time-intensive exercise for us, but inshAllah it is the best resource out there for Muslims wanting to properly understand the Al Rayan mortgage both Islamically and commercially.

Summary

Yes, we’re starting with a summary (there’s nothing worse than trawling through 4,000 words to find a one-paragraph summary tucked away!).

Our conclusion is that, given the current UK context, the HPP is the best Islamic mortgage option out there for those who qualify under the Al Rayan eligibility criteria. However we do have some bones to pick on both the commercial and Islamic side with the HPP as it currently is. We believe the HPP could be better from both a commercial and Islamic perspective if a few tweaks were made to it. We hope this article will help pave the way to making these changes.

From our personal perspectives, Ibrahim has an Al Rayan mortgage, while Mohsin has opted for Heylo Housing (but plans to shift to Al Rayan in the coming years).

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So the situation is that the Buyer wants to buy the House, but he doesn’t have enough money to buy outright. But he does have enough for a 25% deposit. So he approaches Al Rayan bank – and this is what happens:

Al Rayan buys the freehold title in the house at the closing of the transaction, and it is its name that appears on the title. But the buyer gets an equitable interest in the freehold by way of the contract (the DCA – more on that below) and also gets a leasehold for 99 years alongside Al Rayan. This leasehold can only be sold or ended by the consent of Al Rayan, but it does put the buyer on a more secure and long-term footing than a shorter lease would.

Time passes, the Buyer continues paying rent and buying further equity in the House until eventually he owns 100%.

At this point the Bank transfers over the freehold interest in the property to the Buyer, the leasehold ends, and all charges in favour of the Bank are removed from the charges register.

HMRC is thankfully agreeable to only charging Stamp Duty Land Tax (“SDLT”) once, and so SDLT is only payable upon the initial purchase of the house, and not on the final transfer of the freehold by the bank.

Incidentally, this is one area where Al Rayan has an advantage over Heylo.

Which scholars approve and disapprove of the Al Rayan HPP?

Are there any issues?

Insurance

An Islamic mortgage necessarily needs to be substantively different from a conventional mortgage. It can’t just be cosmetic changes. We are told that the HPP is substantively different from a conventional mortgage in a number of ways, primary among them the fact that the bank takes on a different set of risks to that taken on by a conventional provider. Let’s take a closer look at some of the key risks at play here. 

As you can see, Al Rayan has effectively hedged the risk in respect of all but one risk (Risk 3). We do not think that Al Rayan needs to be exposed to all of these risks, and we do think that insuring away the risks is an effective and acceptable strategy, but we do make the following recommendations to improve the risk exposure split between parties:

1. Al Rayan should purchase the insurance for each of its properties. It should purchase a global insurance policy and, if it really wants to, pass on the cost through a slight increase in its global profit margin. But the fact that insurance is used to hedge so much of the bank’s risk, and is also bought by the buyer seems unfair and sends the wrong message to the customer. 
2. Al Rayan’s insurance will presumably be broad and cover a wide array of risks that would lead to damage or defect to the property. Accordingly it should bear Risk 2. Given the vanishingly small risk of a property being damaged by a risk that is not insured, this is not a big ask. The thinking behind this recommendation is that fundamentally any damage or defect to the property is the bank’s responsibility (or at least its share of the property). It is fine that the bank has sought to insure away this liability the best it can – but then the little bit it hypothetically hasn’t been able to insure away, it shouldn’t just transfer that back to the buyer. It’s not the buyer’s fault that the insurance coverage bought isn’t broad enough.
3. Al Rayan should consider buying insurance to cover the potential shortfall in Risk 4.  

No sharing in upside or downside risk

We don’t think this is ultimately a really substantive issue. See our reasoning in this article and this article. 

Too much like a debt instrument

This is a sensible concern. We discuss this in the “Why do we think it is acceptable” section below. Ultimately we conclude that, given where we are right now in the Islamic finance industry’s development and the size of the Muslim population, Al Rayan’s model is acceptable. However, we are very much keen to see progression and Al Rayan and others evolving their models as the Muslim community grows and as the gains in infrastructure, tech and regulation allows banks a bit more breathing space. 

What are the other options?

Why do we think the Al Rayan HPP is acceptable?

At IFG we consider the HPP product Al Rayan is offering to be permissible and the best Islamic mortgage product available right now.  

The HPP is not a perfect model and an arguably more Islamic model is something like what Primary Finance are trying to implement or Heylo Housing and other shared-equity schemes offer. This is because these schemes genuinely let you choose to not buy back your home and simply rent for periods.  

However these schemes are either (a) just starting out and not well-funded or widespread enough to be a genuine solution for the vast majority of Muslims right now (Primary Finance); or (b) more expensive than Al Rayan and conventional providers (Heylo Housing, Primary Finance and other shared equity schemes) and so hard to seriously scale up. 

A genuine solution for British Muslims needs to have scale and liquidity sufficient to meet the demand for Islamic mortgages and at the same time be affordable. But that means having to set up a proper regulated bank, raising necessary liquidity, and adhering to tight regulatory and liquidity rules. All this costs money, and means that such a bank needs to be able to package up its Islamic mortgage product in such a way as to effectively minimize risk for itself as much as possible and mimic the debt-like characteristics of mainstream mortgage providers. 

Enter Al Rayan. 

So why exactly is Al Rayan more expensive?

Well, the cost of financing is generally higher for Islamic banks (as they can’t borrow from the Bank of England (yet) or the mainstream money markets at low interest rates). They have to get their money from savings accounts and sukuk offerings, and this is more expensive because people with savings account or holding sukuks want to get paid. Additionally there’s the whole other issue that Muslims in the UK constitute about 5% of the population, and only a subset of them actually care enough to use Islamic mortgages. So Al Rayan’s target audience is (relatively speaking) tiny, and accordingly its prices won’t benefit from the economies of scale that larger lenders benefit from and reflect in their pricing.  

A couple of points to wrap up the Islamic and legal analysis though. 

Firstly, if a solution like Primary Finance gains traction and gets hold of the necessary liquidity sufficient to reduce its prices to be around Al Rayan’s and to meet the demand, we would prefer it to Al Rayan. But that’s genuinely a big “if”. People like Strideup have tried and failed and have had to pivot to a HPP model. 

Secondly, Al Rayan (and other Islamic banks) have now reached an agreement with the Bank of England to be able to get access to sharia-compliant liquidity. This should in theory reduce the cost of capital to the bank, and therefore lead to a reduced rate being charged to customers. This should give a little more breathing room to the banks to be able to implement some of the risk allocation measures we recommend above, as well as passing the saving down to customers. We will be watching this market closely and fighting for the Muslim retailer to the best of our ability.

Commercial Analysis

One of the key frustrations with Islamic mortgages is that they’re more expensive than their mainstream counterparts. For many, this is in fact the driver for them to go with a conventional mortgage. We’ve explained the economics behind why this is the case above.

In short, we think being driven by price is the wrong approach to take from an Islamic point of view. After all, if you accept that mainstream mortgages are haram, then you’re comparing apples and oranges because you shouldn’t be going for the haram product anyway. It’s a bit like saying that you’ll go for the haram meat at Tesco because the halal butcher is too expensive. 

That being said, it is still useful to look at the conventional mortgage market and see where Al Rayan fit in from a pricing perspective.

How does Al Rayan compare against mainstream mortgage providers? 

Let’s take an example of someone who is buying a house for £250,000 and has a 10% deposit (in other words, they’re going for a 90% LTV mortgage. LTV stands for “loan-to value” ratio, and is simply a figure to express what percentage the loan is in comparison to the property being bought).

They choose a mortgage term of 30 years. We’ll look at 4 major high-street banks and see how Al Rayan fares against them. Note: these figures are accurate as at July 2019. 

Clearly, Al Rayan is much more expensive than a conventional lender. Around 30-40% more expensive. Or to put this in more concrete terms, you’d be paying over £300 extra per month in this example case, close to £4,000 a year. That’s a fancy holiday or, true to our ethos, you could invest that money and grow it. 

There’s little doubt that mainstream providers are cheaper. We really want the main players to come back with sharia-compliant products. HSBC and Lloyds did used to offer them and the Muslim community missed a trick by not supporting these products.  

As it stands though, there are no mainstream banks offering halal mortgages.

Al Rayan versus other Islamic Banks

Let’s carry on using the same example of a 30-year mortgage term on a £250,000 house but change it to a 20% deposit (i.e. borrowing £200,000). The reason for this is that Al Rayan are the only Islamic bank offering a 10% deposit mortgage so it would be difficult to compare without changing the example deposit amount. 

You should do a comparison for your own particular circumstances (deposit, length of term etc). Don’t forget to factor in that when the rate reverts to the variable rate, you will be exposed to a changing rate (usually pegged in some way to the Bank of England base rate). 

In this scenario and for this particular product, Gatehouse is coming out slightly cheaper. 

A side note: going for an 80% mortgage might seem like a no-brainer as it is cheaper, but sometimes a 90% mortgage might make more sense as you can then retain some cash to either (a) do up the house; or (b) invest it in something that will yield more returns than your house will over the same period. We’ll do a fuller article exploring this whole question soon.

Al Rayan versus Shared Ownership Models

If you’re not familiar with shared ownership then it’s basically a model whereby you own a certain amount (e.g. 10%), the same as with an Islamic mortgage. You also pay rent on the share that you don’t own (similar to an Islamic mortgage). But your rent does not pay down equity in the house. Nor do you have to buy any more equity in your house (though there is the option to do so which will, in turn, reduce your rental payments).

We will explore the commercial rationale behind going for shared ownership in a future article, but it can be useful if you cannot get an Islamic mortgage for whatever reason (or you don’t want to). 

Let’s look at how AR stacks up against a well-known shared ownership provider, Heylo Housing. We’ll use the 20% deposit example above – 20% down on a £250,000 house. 

On these sums, Heylo would work out slightly cheaper (even factoring in the much higher product fee). We have measured that by looking at the cost over the first 12 months (including product fee) which would be around £11,100 for AR and £10,980 with Heylo (if buying a freehold). But given that you aren’t buying any equity in your house with Heylo, the balance probably shifts in favour of Al Rayan on pricing alone. 

The other factor tipping the balance in favour of Al Rayan here is that Heylo increase their rent every year by 0.75% + RPI (I.e. inflation). For example, if RPI is 2.5%, then your rent would increase by 3.25% next year. In our example, that means going from £815 a month to £841.  

On balance, Al Rayan wins out as the cheaper product here over time. 

Al Rayan v Renting

You might choose to rent for all sorts of reasons. How does that choice compare with taking out a mortgage? Let’s use the example of a £250,000 house in Birmingham. For that sort of money, it looks like you can get a 3-bed semi.  

Doing a similar search for an equivalent rental property tells you that you can expect to pay something like £750-£900. 

Not dissimilar to what you would pay with an Islamic mortgage, but you have the inflexibility that comes with renting. On the plus side though, you would not be locking any money away into a deposit, nor would you have to pay for many standard household repairs (broken boilers etc). 

Choosing to rent is a very specific choice, but on economics alone, there isn’t a huge amount of difference on the face of it. Over the long term though, buying is usually the more economic choice. 

The Al Rayan Buying Process

So how does this all work practically? The typical Al Rayan process will look like this (taken from this official Al Rayan guide)  

• Stage 1 – Eligibility
• Stage 2 –  Application (anticipate 3 weeks)
• Stage 3 – Offer and conveyancing (anticipate 9 weeks)
• Stage 4 – Release of funds (anticipate 3 days)

It is worth expanding on a few components of this timeline. 

Conveyancing

Conveyancing is just a fancy term for the legal bit of buying a house. You will instruct solicitors to deal with this for you, as will the bank for their part.

Solicitors are notorious for being slow and holding things up. This can be due to all sorts of reasons but from our own experience and having listened to respondents to our survey, you can get the conveyancing process done in as little as 3 months if everything lines up. The Al Rayan graphic says to account for 9 weeks for conveyancing but we think this is ambitious.  

The key here is to stay on top of your solicitors and chase them regularly. Buying a house is a bit like having a side job – you will definitely have to take time out of your day to stay on top of things. If you are an employee, it’s helpful if you have the flexibility to take and make calls during the day without it disrupting your work.

Alternatively, you may at the outset want to ask the solicitor if you can nominate another person who is authorised speak on your behalf. That way you can nominate someone who would be free to just chase the solicitors at regular intervals. 

Deal falling through

A sad reality is that some property deals will fall through (30% of them according to some stats). Circumstances changes, or you might be in a chain that collapses, or a whole host of other reasons can intervene. In these circumstances, it is useful to have home buyer protection insurance. This is an insurance that pays out any lost conveyancing, survey, and bank fees you might have already paid. Check out this link for more information on this. (Note, that we adopt the minority position that insurance is halal – see here)

Surveys

Another key part of the process is the survey for the house. All banks require this and Al Rayan are no exception. There are two types of valuation: 1) Valuation report, 2) Homebuyer report. 

The valuation report is simply a report to assess the valuation of your future home. This is the minimum that the bank requires and the fee for this depends on the value of your home. To give you a rough idea, on a £250,000 house, you can expect to pay just over £300. 

A Homebuyer report incorporates a valuation, but also gives you much more detail. A surveyor will actually inspect the property and write a report outlining how different areas of the house rate. This flushes out any potential issues that you might not have known about or spotted when you looked around yourself (e.g. rising damp, dry rot timber etc). The cost of this again varies depending on the value of the property you are buying but on a £250,000 house, you can expect to pay just under £1,000. 

Note that cost of these figures is taken from Al Rayan as you have to go with their valuer. It would be nice if Al Rayan had some flexibility on this as I know that these reports can be obtained much cheaper. For instance, Heylo Housing allow you instruct any RICS-certified surveyor. This approach makes sense in our view.

ownership & legal status

Al Rayan is the owner of the property. In the background, it enters into a leasing agreement with you as the co-owner, wherein agree to pay rent on the portion of the house that you do not own. So in the example above, you are paying rent on the 79% of the property that you do not own. 

There is also a co-ownership agreement which says that Al Rayan agrees to sell you its share of the property for the amount of the finance that it provides. 

The bank will incorporate into your monthly rental payments a portion which goes towards acquiring some equity in the property. 

This all works from a legal perspective and the good thing here is that you are dealing with a relatively large, trusted organisation. 

You can sell the property at any time and if the value has gone up, you will benefit because you only have to settle the finance amount with Al Rayan. Subject to admin fees, you do not get penalised for settling your finance early which is always welcome. 

Customer Perception

We’re going to use 3 main limbs for this in order of the size of the dataset – 1) Trustpilot, 2) IFG’s own survey, 3) Our own direct experience. 

Trustpilot

Al Rayan has an impressive 4/5 average rating based on 216 reviews. That’s a very good score indeed. 

Unfortunately, Trustpilot do not allow you to filter the reviews by product so some of those 216 reviews will be for other things like Al Rayan’s banking offering. That’s a real shame, but what we’ve done is manually gone through the 216 reviews and picked out a couple of key positive and negative reviews on the mortgage process specifically. 

Let’s look at the first negative Trustpilot review: 

With the caveat that we don’t know the ins and outs of the case, this is a pretty damning review. We have anecdotally heard that Al Rayan’s checks can be quite cumbersome at times. In many ways, this is probably reflective of the fact that they are, relative to mainstream banks, small. They have to take fewer risks than bigger banks and that probably means greater checks. But it’s worth bearing this in mind when it comes to planning your timeline. 

Let’s take a look at another negative review: 

This complaint raises a few issues: 1) solicitor issues (remember what I said earlier about solicitor problems?) and 2) customer service. 

Legal issues can arise for all sorts of reasons and, generally speaking, although the delays might be there, things do usually get sorted. The problems that arise differ from property to property and we don’t know enough in this case to really dig deep. 

Slightly more concerning is the lack of customer service. From this review and others that we have gone through, it is clear that Al Rayan could do a much better job on the customer service side.  

On the plus side, Al Rayan take time to reply to every Trustpilot review and that suggests they listen. 

Positive reviews. 

72% of all Trustpilot reviews were 5*, so we weren’t short of positive reviews to pick up on. Again, let’s look at two. 

This looks like a very happy customer indeed. Someone who got his home purchase succesfully completed on time and without any issue. He is also a fan of the customer service. This is positive, and shows that Al Rayan do have the ability to deliver great customer service. 

This is another glowing review demonstrating the bank’s ability to manage the process really efficiently. 

IFG’s own survey findings

We reached out to Al Rayan customers from the IFG e-mail list to get their honest views on Al Rayan. Here at the highlights for some average scores for key questions we asked.

Q: If you were buying a house today, would you use AR again?
Average result: 6.3/10

Q: How likely are you to recommend AR to someone you know?
Average result: 6.2/10

Q: Thinking about customer service and support specifically, what rating would you give Al Rayan?
Average result: 3.1/10

Q: Now thinking overall, what rating would you give Al Rayan?
Average result: 2.9/10

Other interesting findings (and tips!) from our survey

We also asked some questions that weren’t just about numbers. Things like asking about what they wish they knew beforehand and what they’d get Al Rayan to change if they could.

Here’s a list of things people wish they knew beforehand:

• “Extra unexpected costs (e.g. chancel insurance etc)”
• “That they will have two separate deeds […] us as tenants (leasehold) and they are the owners”. IFG note: we’ve explained this in this article.
• “How long it would take”.
• “A formal document on the process of giving lump sums would have been useful.”
• “They don’t allow the facility to pay extra amounts on fixed rates.”

These are some really useful tips if you are about to enter the process.

Our reader recommendations to make Al Rayan better

We asked our survey respondents to explain one thing that they would advise Al Rayan to change. Here are some of their thoughts:

• Improve the customer service
• Make the process faster
• Try to be more sharia-compliant
• More explanation of the difference in their offering (e.g. what makes it halal)
• Clarity around the justification for their higher prices [IFG note: we have explained this in this article].
• More empathy and flexibility – the process is currently too rigid especially with regard to suitability requirements.

Al Rayan would do well to take notice of these customer recommendations. Some things are hard (e.g. speed of process) but other things like communicating how they come to their pricing is a relatively easy thing to do. By the same token though, it is easy for customers to say that a bank should be more flexible, but given the high regulation of the industry, Al Rayan understandably adopts a cautious approach. There’s a balance here, as nobody wants Al Rayan to face regulatory pressure or be known as the Islamic bank that went wrong.

our person experience

Both of us have had experience of Al Rayan personally. Mohsin when he was in the homebuying process (but ultimately didn’t go with Al Rayan) and Ibrahim also during his homebuying process (still ongoing). We both know people in our circles who have taken our Al Rayan mortgages. 

Our direct experience was overall good. They have always been courteous and relatively swift in their communications and overall things have gone smoothly. 

One area we think they could improve on is their flexibility when it comes to the requirements. They have some very conservative requirements (based on their risk-averse approach) but having some degree of flexibility would be nice. However, we appreciate that a regulated bank has to have policies in place. 

Overall Conclusion

There is no getting away from the fact that Al Rayan is expensive. That is sadly the price we pay for participating in what is a small and relatively new market. Al Rayan’s costs are higher than a mainstream bank and we pay the price of that. Many people fail to recognise the challenge that Islamic banks have on this front but question furiously why they charge so much on their home purchase products. 

Ultimately, when all is said and done, this is a sharia-certified product that we are personally happy with too. Al Rayan have done a great job in this industry of bringing an Islamic home purchase product in the mainstream. They have built up a good brand and are a regulated bank that is well-respected. 

Like any product with any company, there are negative reviews and a few legal and shari’ quibbles. But we also see lots of happy customers too based on Trustpilot and our own survey. We hope that, as more people come to Al Rayan through IFG, we can together influence the overall Islamic mortgage market for the better inshAllah.

If you are buying a house and want to go with Al Rayan, we hope this review has helped!  Remember to fill in the form below to get £150 cashback going through IFG.