Al Rayan Bank reduces rental rates on its buy to let product range by 1.00%

15 January 2018

Al Rayan Bank has announced a 1.00% reduction in the rental rates* of its Buy to Let Purchase Plans (BTLPP). The UK’s largest and oldest Islamic retail bank** has also announced that it has simplified its buy to let finance range by removing its 65% finance to value (FTV) band and making the new attractive rental rates available to all customers requiring up to 75% FTV (25% deposit) on its rent and acquisition product.

The products which are believed to provide the UK’s lowest Sharia compliant buy to let finance rental rates^ are available to landlords either directly – via the Bank’s national branch and office network, its UK based customer service centre, or its website – or indirectly through intermediaries. The rental rates are as follows:

• Discounted variable: 75% FTV, rental rate of 3.14% until 30 June 2020^^
• Fixed: 75% FTV, rental rate of 3.24% until 30 June 2020^^

Other product features include:

• No early settlement penalty for clearing the finance in full early, even during a fixed rental rate period (an administration fee will apply)
• A product fee of 1% (a minimum fee of £995 applies)
• Rent only option available up to 65% finance to value

Unlike conventional buy to let mortgages, where a landlord borrows money from a lender and repays it with interest, Al Rayan Bank, as a Sharia compliant bank, uses the Islamic finance principles of co-ownership (musharaka) and leasing (ijara) on its property finance products. BTLPP customers acquire the property jointly with the Bank, their monthly payments increase their share in the property, whilst at the same time they pay a rental charge to the Bank for use of the portion of the property that they do not yet own. At the end of the finance term, when the finance has been settled, ownership transfers to the landlord.

* The terms ‘rental rate’, ‘rent only’ and ‘acquisition and rent’ for Al Rayan Bank’s BTLPP range do not refer to the rental agreement between the landlord and the tenants occupying the property. Instead they refer to the payment arrangement between the landlord and the Bank, which usually consists of two elements, i.e. an acquisition and a rent payment. See the explanation entitled ‘How does a BTLPP work?’ in the notes below for more details.

** Al Rayan Bank is the largest Islamic bank in the UK by assets as per 2016 published accounts.

^ Al Rayan Bank Discounted Variable 75% FTV BTLPP rental rate of 3.14% is believed to have the lowest rental rates of all Sharia compliant buy to let finance products in the UK market as of 12 January 2018.

^^At the end of the fixed period (20 June 2020), rental rates will revert to the Al Rayan Bank Variable Rental Rate, which for Buy to Let is 5.49% (Bank of England Base Rate (BBR) + 4.99% margin). This is the Bank’s revert rental rate.



How does a BTLPP work?

The principle difference between a BTLPP and a conventional buy to let mortgage is that the lending/borrowing relationship does not exist. Instead, BTLPPs are based on co-ownership and lease agreements arranged using two separate principles of Islamic finance. For this reason interest does not form part of the arrangement and each monthly payment consists of the following two elements:

Rental element – this is the amount that the customer pays to the Bank as rent on the Bank’s share of the property. This is in accordance with a lease (Ijara) agreement.

Acquisition element - this is the amount that the customer pays to purchase a part of the Bank’s share in the property. This is in accordance with a co-ownership (Diminishing Musharaka) agreement. With every payment, the customer’s equity in the property increases and the rental element decreases, reducing the Bank’s share in the property on a diminishing basis. However, with a rent only BTLPP, the customer’s payments only cover the rent paid to Al Rayan Bank and does not increase the customer’s share in the property. To acquire the Bank’s share in the property, the customer will need to make a lump sum payment at the end of the finance term.

The customer can buy the Bank’s share or sell the property at any time without incurring any penalty charge, subject to clearing the finance amount in full. The Bank does not claim any share in any appreciation of the property.

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