Islamic mortgages

Islamic mortgages allow Muslims and others to buy a property while remaining compliant with Sharia law.

Islamic mortgages allow Muslims and others to buy a property while remaining compliant with Sharia law.

Daniel Evans
Mortgages expert
minute read
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Posted 30 DECEMBER 2019 Last Updated 22 DECEMBER 2020

What is an Islamic mortgage?

An Islamic mortgage is one that’s compliant with Sharia law. These mortgages differ from traditional home loans in that they don’t involve paying interest, as that’s forbidden under Sharia law.

In order to qualify for a Sharia mortgage, you’ll typically need a deposit of at least 20% of the property. Sharia mortgages are often referred to as Home Purchase Plans(HPP), of which there are three types: Ijara (lease), Musharaka (partnership) and Murabaha (profit).

Ijara: this is when the bank purchases the property you want to buy and leases it to you for a fixed term, at an agreed monthly cost. When the term is over, full ownership of the property will be transferred to you.

Musharaka: is a co-ownership agreement, where you and the bank own a separate share of the property. Each time you make a repayment, which is part capital and part rent, you buy more of the bank’s share. Consequently, your rent reduces as your share grows and, eventually, you’ll own the bank’s share of the property.

Murabaha: this is when the bank buys the property on your behalf. They then sell the property to you at a higher price. The higher price is repaid by you in equal instalments over a fixed term. For example, you may be looking to buy a house valued at £150,000, but the bank may sell the property to you for £200,000.

How can I be sure that an Islamic mortgage is Sharia compliant?

Lenders that offer Islamic mortgages will usually be able to show that they’ve received Sharia compliance guidance from an authority in Islamic law.

Islamic mortgages are available from a variety of providers and are regulated by the Financial Conduct Authority (FCA), so customers will get the same protection as they would had they taken out an interest-charging mortgage.

Are Islamic mortgages more expensive?

Islamic mortgage products can be more expensive than other mortgages because the Sharia-compliant lender has to cover higher administration costs.

It’s also likely you’ll need to put down a larger deposit. For example, a non-Sharia mortgage might be available with a deposit of just 5%, whereas a Sharia mortgage may require a deposit of close to 20%. However, it can vary between providers.

What are the risks of an Islamic mortgage?

While an Islamic mortgage sounds like a great ethical alternative to a traditional home loan mortgage, there is still a level of risk involved, as there is with any loan product.

Although the idea of an Islamic mortgage is that you are sharing an equal risk with the lender, this isn’t strictly the case. If you’re late or miss payments on your Islamic mortgage, you’ll normally be fined, until eventually your home may be repossessed. You should check fine and repossession terms before you take out an Islamic mortgage, and understand the penalties for failing to keep up with your payments.

Looking for a Sharia mortgage?

If you’re looking for an Islamic mortgage, one which is halal (lawful), you can apply for one through a specialist provider. The Al Rayan Bank (formerly Islamic Bank of Britain) and UBL UK (United Bank Limited) are the main providers of Islamic mortgages in the UK, however other providers may also offer Sharia-compliant mortgages.

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