Skip to content

Islamic mortgages

For some people, getting a mortgage isn’t just about the financial considerations. Ethical and religious values are important too. Islamic mortgages allow Muslims, and others, to buy a property while still being compliant with Sharia law. Let’s take a look at how they work.

For some people, getting a mortgage isn’t just about the financial considerations. Ethical and religious values are important too. Islamic mortgages allow Muslims, and others, to buy a property while still being compliant with Sharia law. Let’s take a look at how they work.

Written by
Alex Hasty
Insurance comparison and finance expert
Last Updated
24 AUGUST 2023
6 min read
Share article

What is an Islamic mortgage?

Islamic mortgages are mortgages that are compliant with Sharia law.

Also known as ‘halal mortgages’, they differ from traditional home loans in that you don’t pay interest as this is forbidden under Sharia law. Making money from money goes against Islamic finance beliefs. 

Strictly speaking, it shouldn’t really be called a mortgage, because it’s actually a no-interest home purchase plan (HPP). In other words, a form of sale and lease agreement. But the purpose of a halal mortgage is still the same as a mainstream mortgage – to provide prospective homeowners with the finance they need to buy a property. 

The good news is that the government’s Help to Buy mortgage guarantee scheme can now also be used for HPPs like halal mortgages. This means that Muslim homebuyers who were unwilling to take out a traditional mortgage because of their religious beliefs, can now benefit from the affordable homeownership scheme.  

How does an Islamic mortgage work?

Although they can come in different guises, home purchase plans generally all follow the same principle. 

The bank buys the property you want on your behalf and initially becomes the legal owner. You then make monthly payments as if you were paying rent, with a portion of the money going towards buying the property from the bank.

This is also the case when it comes to Islamic mortgages in the UK. Effectively, the bank replaces interest with rent, so it becomes a Sharia-compliant mortgage.

At the end of the mortgage term (the length of time the loan runs for), you’ll either have repaid the bank in full and own your home outright, or there’ll be an amount left to pay that needs settling before you can become the rightful owner. 

Types of Islamic mortgages

There are three main types of Sharia mortgage in the UK:

Ijara (lease)
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 (partnership)
This type of Islamic mortgage 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 (profit)
With this type of mortgage, the bank buys the property on your behalf and then sells it 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.  

In the UK, Murabaha is most often used to buy commercial property rather than residential homes. 

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). This means that customers get the same protection with Sharia mortgage finance as those who take 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. Plus, there’s a smaller pool of lenders to choose from, meaning there isn’t as much competition in the market to drive down 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 minimum deposit of 20%. But this can vary between providers.

What are the risks of Islamic mortgages?

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

Although the idea of a Sharia-compliant mortgage is that you’re 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. 

Your home may be repossessed if you do not keep up with your mortgage repayments.  

Which banks offer Islamic mortgages in the UK?

Sharia banking is growing in popularity in the UK, with a number of Islamic bank mortgages available. So, if you’re looking for a halal mortgage, you can apply for one through a specialist provider.

  • Ahli United Bank
  • United National Bank
  • Gatehouse Bank.

These are the main providers of halal mortgages. Other providers may also offer Sharia-compliant products, so always do your homework to see which lender can offer you the best deal.

Before you make any concrete decisions, it might be worth getting financial advice from a mortgage broker with experience of Sharia banking. They can help you find a lender and product that’s suitable for you. 

Frequently asked questions

Can anyone apply for an Islamic mortgage?

Although Islamic mortgages are primarily aimed at Muslims looking for a Sharia-compliant way to buy a home, they’re an option for non-Muslims too.

Much of their appeal lies in the fact that Islamic banks must operate within certain ethical and social boundaries to abide by Sharia law.

This means any money raised by them must not be reinvested in companies with links to tobacco, alcohol, gambling, weapons or pornography.

What deposit do I need for a Sharia mortgage?

To qualify for a Sharia mortgage, you’ll typically need a minimum deposit of 20% of the property’s value. That said, it might be possible to find home purchase plans that need as little as a 5% deposit.  

For example, the government’s Mortgage Guarantee Scheme, which has increased the availability of 95% mortgages, can now be used when taking out a halal HPP.

The more you can put towards the cost of your new home, the better. This will allow you to benefit from the best home purchase plans and pay less monthly. 

What fees will I need to pay with an Islamic mortgage?

The type of costs and fees associated with buying a home with a Sharia mortgage are broadly the same as those of a traditional mortgage.  

These include: 

Remember to budget for these extra costs as well as your deposit. 

Do Islamic mortgage lenders carry out credit checks?

In the same way that conventional lenders carry out checks on your credit history when you apply for a mortgage, Islamic banks will follow the same guidelines.

After all, they still need to be sure you can afford your monthly repayments during the term of your loan.

They will also take a thorough look at your income and outgoings before deciding whether to approve your application or not.

The content written in this article is for information purposes only and should not be taken as financial advice. If you require support on the products discussed here, please speak to your bank/lender or seek the advice of an independent professional financial advisor. We also have more information on our Customer Support Hub.

Looking for a mortgage?

Compare mortgages in minutes to see if you can save.

Compare now

Alex Hasty - Insurance comparison and finance expert

At Compare the Market, Alex has had roles as Commercial Associate Director, Director of Trading and Director of Growth. He’s currently responsible for the development and execution of Comparethemarket’s longer-term strategic options, ensuring the right breadth of products and services that meet customer needs.

Learn more about Alex

Compare mortgages quickly and easily Start comparing