shared ownership can work for muslims too

Housing associations value diversity. So it is odd that the current legal and regulatory regime should so effectively block Muslim families' access to shared ownership and right to buy properties.

The reason for restricted access is twofold. First, under Sharia law (to which all practising Muslims subscribe), the payment or receipt of interest, fixed or variable, is forbidden. This means Muslims cannot take out mortgages for shared ownership and right to buy, which have always been interest-based. Second, although Sharia-based lending products are available, they incur a double stamp duty effect on a shared ownership lessee.

This second issue was finally resolved in the last Budget and this means the Islamic finance market in the UK is set to grow. It is certainly in the interests of the housing sector that it does: research has shown that a sense of ownership is very important to the Muslim community, so if a financial product can be found which is acceptable to them, shared ownership housing associations would have a new potential client base.

The Council of Mortgage Lenders hopes councils will sign up to a voluntary scheme in which lenders will be allowed to validate right to buy transactions using Islamic mortgages. This is certainly encouraging for tenants who may wish to exercise the right to buy with a Sharia-compliant mortgage or take up a shared ownership lease.

However, until now Sharia-compliant lending has been carried out, in the UK, at generally uncompetitive rates and solely for larger loans. If the market wishes to bring in Islamic finance, finance providers must be encouraged to enter what is already a very specialised area.

The status quo
In Islamic mortgages, Sharia-compliant products currently available in the UK are based on Murabaha or Ijara. The Murabaha method is an arrangement whereby the property is purchased by the lender at the agreed price and then immediately resold to the borrower at a higher price, determined by the number of years over which payment is to be made, usually over a period of 15 years, in lieu of interest. Under the Ijara method, the lender sells the property to the borrower at the original price and charges "rent", rather than interest, to cover the interest element of the loan. Under this arrangement, the property is occupied by the borrower under a lease and payment by the borrower is usually spread over an agreed term of up to 25 years. Once the borrower has repaid the money on the property purchase, the property is transferred to the borrower.

In either method, the borrower does not fully own the house until the final payment is made.

Council properties bought via the right to buy or housing association homes bought via the right to acquire cannot, at present, be Sharia-compliant. In these cases the properties are bought by the lender rather than the tenant/borrower.

It is hoped that councils will join a voluntary scheme in which lenders are allowed to validate right to buy using Islamic mortgages

Under the right to buy, the property must be purchased by the tenant. If they are sold on within a certain period, the discount is clawed back.

In shared ownership schemes, the lessee acquires only a share of the property and pays rent to the association on the remaining share. Gradually, the tenant may buy further shares until it owns the property outright. Properties bought under shared ownership cannot qualify for Sharia-compliant mortgages because the lessee still needs a loan and is not in a position to sell or lease the property under the terms of such transactions.

Change ahead
However, with Housing Corporation approval, shared ownership could potentially be adopted by housing associations and made Sharia-compliant under the Ijara method.

Under this arrangement, the housing association could transfer the remaining share not owned by the lessee to its own lender. This could happen on the agreement that the lessee enters into a sub-lease with the lender. The rent payable under the sub-lease is not just another name for interest: under Islamic law, it would be seen as a fair payment for use of the property, rather than a charge for borrowing money.

Once the lessee repays the loan, outright ownership of the property transfers to them. Similarly, when the tenant sells property acquired through the Homebuy scheme, they have to repay the credit taken from the association. Under the terms of the loan there are no interest or other credit charges.

However, the amount the tenant has to cough up when the loan is repaid is linked to the value of the property at the time of disposal. Potentially, loans offered to tenants under this scheme could be adopted by associations to ensure they are fully compliant with Sharia law.

Using the Murabaha arrangement, the property would be sold by the association at its open market value, plus the expected appreciation costs of the property at the point of future sale. The primary risk for the association is that when providing the loan to the tenant, it will need to determine at the outset how much the property is expected to appreciate in value.