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.

Daniel Evans
Mortgages expert
6
minute read
Do you know someone who could benefit from this article?
Last Updated 4 JULY 2022

What is an Islamic mortgage?

An Islamic mortgage is one that’s compliant with Sharia law. It differs from a traditional home loan in that it doesn’t involve paying interest, as that’s forbidden under Sharia law. This is because 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 its purpose is still the same as a mainstream mortgage – to provide prospective homeowners with the finance they need to buy a property.

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. Effectively, the bank replaces interest with rent so it’s halal (lawful).

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 will be an amount left to pay that needs settling before you can become the rightful owner.

Types of Islamic mortgage

There are three main types of Sharia mortgage in the UK – Ijara (lease), Musharaka (partnership) and Murabaha (profit).

Ijara 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 is when 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), 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. 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 deposit of between 10% and 35%. But this 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.

Which banks offer Islamic mortgages in the UK?

Sharia banking is growing in popularity in the UK, with a number of Islamic banks offering halal products. So if you’re looking for an Islamic mortgage, you can apply for one through a specialist provider. Banks that currently offer Sharia-compliant mortgages in the UK include:

  • Al Rayan Bank (formerly Islamic Bank of Britain)
  • Ahli United Bank
  • Gatehouse Bank.

These are the main providers of halal mortgages, but 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 who can help you find a lender and product that’s suitable for you.

Frequently asked questions

Can anyone apply for an Islamic mortgage?

Yes. 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 an Islamic mortgage?

To qualify for a Sharia mortgage, you’ll typically need a deposit of between 10% and 35% of the property’s value. That said, it might be possible to find home purchase plans that need as little as a 5% deposit. The more you can put towards the cost of your new home the better as 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 fees and costs associated with buying a home with a Sharia mortgage are broadly the same as those of a traditional mortgage. They include survey and valuation fees, stamp duty, legal costs and buildings insurance. So remember to budget for these extra costs as well as your deposit.

Do Islamic mortgage lenders carry out credit checks?

Yes. 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.

Looking for a mortgage?

Compare mortgages in minutes to see if you can save

Compare now
Compare mortgages quickly and easily Start comparing