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Should I begin shariah compliant investing or purchase a but-to-let property?

Zara | West Midlands| 12/03/2019 | 0

  • Lifetime ISA
  • Cash
  • Robo Adviser

Zara's question in full

Hello. I am in my mid 20s earning a regular salary (outside London). I have decent savings and whilst toying with the idea of Wahed Invest (keen to know your thoughts, as I am looking for shariah compliant funds), I am dabbling with the idea of property. If I have no financial commitments (living at home for next 2 yrs), is it worth putting 90% of my savings for a house deposit for buy-to-let purposes? I am thinking this would reduce my loan to value. Thank you!

David Stone's Response

Dear Zara,

Thank you for your question.

Interesting that you mention Wahed Invest, as I believe they are the first (and maybe only) Shariah-compliant “robo-adviser” in the UK.

I can’t say much about their proposition other than they do seem expensive, relative to other robo-advisers, which should be considered when weighing up whether to invest with them.

Putting aside the shariah element for the moment

On the basis that you are living at home, then I assume your savings are intended to help you purchase your first property?

If so, it would not normally be sensible to invest into investment funds of any kind, as the inherent changes and volatility of the market, mean that the time horizon for any such investment should be really 5 years+. I imagine this doesn’t match your shorter timescale to purchase your first house.

Moving on to your question about purchasing a buy-to-let

I should point out that it is quite difficult to qualify for a buy-to-let mortgage without having a substantial deposit, typically in the region of 25% or more.

Also this would lock your capital up, and presumably prevent you from purchasing your own home for some time.

Buy-to-let mortgages also tend to come with higher fees and interest rates than residential mortgages, on top of the normal transaction and taxation costs.

Finally...

As you want to invest on a Shariah-compliant basis, I imagine you would also want to borrow on the same basis, i.e. using the Islamic structures of either “Musharaka” or “Ijara”.

Whilst those mortgages are indeed available at 90% loan-to-value to buy your own home, I cannot find any that will allow you to purchase a buy-to-let property at 90% loan-to-value.

I would normally recommend that you consider a “Lifetime ISA” as this is designed to help people save up towards a house-purchase, however I am not aware of any on the market that are currently shariah-compliant.

On the presumption that is of primary importance to you, I might suggest that you opt for a shariah-compliant Cash ISA, Al Rayan bank offer one with an “expected profit” of 1.60% for example.

You could then withdraw the monies when you are ready to purchase your first home, and in the meantime you would suffer no risk of losing capital, nor suffer any investment charges.

I hope this answers your question and best of luck for your future.

David

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David Stone

David started Mansion House Capital with his (now) wife back in 2000, they advise across all areas and mainly look after London-based professionals who are too busy and/or too bored to prioritise planning their own finances. David is a Chartered Financial Planner and Fellow of the Personal Finance Society.

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