Gatehouse Bank launches five-year home finance deal: how do Islamic ‘mortgages’ work?
Could Gatehouse Bank’s new ‘Home Purchase Plan’ help you secure a home?
Gatehouse Bank has launched its longest fixed-rate deal for aspiring home buyers, becoming the latest Islamic bank to offer a five-year home finance option. So, what is the new Gatehouse mortgage alternative and how do these deals work?
Islamic financial principles prevent you from borrowing or lending money in exchange for interest. This means some Muslims can’t buy a property using a standard mortgage.
The mortgage alternatives offered by Islamic banks allow you to abide by these principles while still securing finance for your home.
Find out how Gatehouse Bank’s deal compares and whether it could help you secure a home.
- Looking to buy a home? Get expert mortgage advice first and call Which? Mortgage Advisers on 0808 302 6940.
What is an Islamic mortgage alternative?
An Islamic mortgage alternative – sometimes called a ‘home purchase plan’ – isn’t the same as a normal home loan.
Once you’ve found a property that you like and agreed a price with the seller, an Islamic mortgage provider will then buy the property for you.
The bank will then sell the property back to you at a higher price. You then pay the bank back in instalments.
Buyers can also choose to lease the portion of the property they don’t yet own back from the bank, gradually buying more of the property over the term of the agreement.
The idea is to take interest out of the equation, and make it possible for Muslims to purchase homes.
- Find out more: mortgage types explained
Gatehouse launches new mortgage alternative
Under the new offer from Gatehouse Bank, homebuyers can now apply for a five-year fixed-rate deal, with an initial rate of 2.99% (reverting to an SVR of 4.5%).
You’ll need to have at least 20% of the amount you borrow (an 80% finance-to-value ratio), and repay over a term of up to 35 years.
On top of this, Gatehouse will also be cutting rates on its existing Islamic home finance products by up to 0.7%. This means that the Bank’s two-year fixed deal will fall from 3.19% to 2.79%. You’ll need to have at least 50% of the loan up front (50% FTV).
Who else offers Islamic home finance?
Currently, Al Ryan and UBL are the only other banks offering Islamic mortgage alternatives in the UK.
Al Rayan offers two and three-year fixed deals ranging from 60% FTV to 95% FTV for homes worth a minimum of £80,000. The maximum amount of finance the bank offers is £1.5m and the repayment term ranges from seven to 32 years.
UBL’s mortgage offerings can be found by using the calculator on their website, though you must contact them directly for rate information.
- Find out more: how much can you borrow?
Islamic mortgage alternatives vs standard mortgages
We’ve rounded up some key points to consider if you’re thinking about getting an Islamic mortgage.
Are Islamic mortgages cheaper?
Although Islamic mortgages generally have fewer fees and charges related to them, the repayment rate is likely to be more than interest on a standard mortgage.
This partly because there are less providers in the market, creating less competition.
Over the course of the agreement, this means you’re likely to pay more under an Islamic mortgages than a standard mortgage.
- Find out more: finding the best mortgage deals
How stamp duty applies
As a general rule, when you buy a property, you may need to pay stamp duty.
If the property you’re buying is over the threshold – £300,00 for first-time buyers or £125,000 for home movers – you’ll need to pay this when the bank first purchases the home for you.
However, when you’ve repaid the debt to the Islamic finance provider and the property is transferred to you, there won’t be a second stamp duty bill to pay.
- Find out more: stamp duty calculator
Do you have to be a Muslim to use an Islamic lender?
You don’t have to be a Muslim to get an Islamic home finance deal.
Indeed, Sharia-compliant banks operate with an ethical framework that may appeal to a wide range of customers. For example, they do not use their profits to invest in gambling, alcohol, tobacco or pornography.
However, keep in mind that rates are not likely to be as competitive as other mortgage lenders.