Islamic mortgages

What is an Islamic mortgage?

An Islamic mortgage lets you buy a home in a way that’s compliant with Sharia law, without needing to pay the entire amount up front.

Also known as a ‘halal mortgage’, it differs from a regular UK mortgage because there is no interest to pay on your monthly payments (a practice forbidden under Sharia law).

Another way to describe it is as a no-interest home purchase plan. In other words, it’s a form of sale and lease agreement. However, 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.

How does an Islamic mortgage work?

Although they can come in different forms, home purchase plans generally follow the same principle. You find a property you’d like to buy and ask the bank to buy it on your behalf.

The bank becomes the legal owner and you repay it each month, with part of the payment covering the ‘rent’, and part going towards actually buying the property from the bank.

At the end of the plan’s term – usually 25 years – you’ll:

• have repaid the bank in full and own your home outright, or

• need to settle a final amount before you can take ownership.

This same principle applies to Islamic halal mortgages in the UK. In effect, the bank replaces interest with rent to create a Sharia-compliant mortgage.

Types of Islamic mortgages

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

Ijara wa Iqtina (lease-to-own) and Ijara (lease)

An Ijara wa Iqtina agreement sees you buy a home from the bank through a series of monthly rent payments. Each month, a share of this rent repayment will pay off a small chunk of your property’s purchase price.

When the term is over, full ownership of the property will be transferred to you.

A variation on this, sometimes called a ‘rent-only’ mortgage, is the Ijara plan which can work in a similar way to an interest-only mortgage.

Under an Ijara agreement, a Sharia bank purchases the property you want and leases it to you for a fixed term at an agreed monthly cost. You essentially pay the bank monthly rent but don’t take ownership of the home.

This type of Islamic financing is sometimes used for buy-to-let properties.

Musharaka (partnership)

This type of Islamic mortgage is a co-ownership agreement where you and the bank each own a separate share of the property.

You’ll need a deposit to get a Musharaka plan. The bigger the deposit, the less it costs to buy out the bank.

It’s sometimes called diminishing Musharaka because each time you make a repayment, which is part capital and part rent, you buy more of the bank’s share. In this way, your rent reduces as your share grows and eventually you own your home outright.

Murabaha (profit)

With this type of mortgage, the bank buys the property on your behalf and then immediately sells it to you at a higher price. The higher price reflects the bank’s agreed profit margin, rather than a rate of interest. You then repay the bank in equal instalments over a fixed term.

For example, you may be looking to buy a house valued at £300,000, but the bank mIght sell the property to you for £325,000. You’ll often have to pay the bank a deposit at the start of the agreement – typically around 20%.

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

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

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

If you’re in any doubt, you could speak to your Iman or ask for advice from an independent Islamic scholar.

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.

You can check the FCA Financial Services Register to see if an Islamic mortgage lender is authorised in the UK.   

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. And with a smaller pool of lenders to choose from, there isn’t as much competition in the market to drive down costs.

It’s also worth noting that the rent you pay to your Islamic mortgage provider may not be equivalent to the local rents in your area. The amount you pay in rent is typically calculated based on a particular rate – for example the Bank of England base rate. This means it could be lower or higher than a market rate of rent being paid by your neighbours.

What are the risks of Islamic mortgages?

Although the idea of a Sharia-compliant mortgage is that you’re sharing an equal risk with the lender, you still face the possibility of running into difficulties. If you’re late or miss payments on your Islamic mortgage, you’ll usually be fined until eventually your home may be repossessed.

Check all the penalty and repossession terms before you take out an Islamic mortgage, as well as the consequences for failing to keep up with your payments.

Whichever type of Islamic mortgage you choose, make sure you understand how your monthly payments will be calculated.

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 several Islamic bank mortgages available. If you’re looking for a halal mortgage, you can apply for one through a specialist provider such as:

• Ahli United Bank

• Gatehouse Bank

• Heylo Housing

• Wayhome

• Stride Up

Although these are among the main providers of halal mortgages, other providers may also offer Sharia-compliant products. Be sure to compare different offers to find the best deal to suit you.

Before you make a decision, you might want to get financial advice from a mortgage broker with experience of Sharia banking. They should be able to help you find a lender and product to match your needs.