Table of Contents
- What is an Islamic mortgage?
- How does an Islamic mortgage work?
- Types of Islamic mortgage
- How much deposit do you need for an Islamic mortgage?
- What fees will I pay on an Islamic mortgage?
- Which banks offer Islamic mortgages in the UK?
- Can anyone use an Islamic mortgage?
- Islamic mortgage pros and cons
- Are there risks involved with taking out an Islamic mortgage?
- Islamic Mortgage FAQs
Islamic mortgages are designed to allow home buyers to borrow without paying interest, which is forbidden under Islamic law.
This makes an Islamic mortgage an option for Muslims, and others, who want to raise finance to buy a home while remaining compliant with their beliefs under Sharia law. For this reason, you might also find Islamic mortgages are broadly referred to as Sharia-compliant mortgages, halal mortgages (halal means allowed and correct according to Islamic law), and Muslim mortgages.
Read on to learn more about how Islamic mortgages work, who offers these home purchase plans, and what to consider when looking for a Sharia-compliant mortgage.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
What is an Islamic mortgage?
In truth, Islamic mortgages shouldn’t be called mortgages at all – they are home purchase plans. Instead of charging interest, as happens with a traditional mortgage, a home purchase plan, or HPP, is essentially a form of sale and lease agreement. The aim, however, is the same: to provide homebuyers with the finance they need to buy a property.
How does an Islamic mortgage work?
Home purchase plans generally involve the bank buying, and initially owning, the property you wish to buy. The monthly payments you make will partly go towards buying the property from the bank and partly be considered rent for allowing you to live there. Once the mortgage term ends, the idea is that you’ll either have repaid the bank’s capital outlay in full, meaning ownership of the property can pass to yourself, or there will be an amount left to pay that needs settling before you can assume ownership.
Types of Islamic mortgage
There are three main types of Sharia-compliant mortgages in the UK:
Ijara mortgage
With an Ijara home purchase plan, a Sharia bank buys and becomes the legal owner of the property you’ve found, and leases it to you.
Sometimes also called an Ijarah or rent-only mortgage, you’ll need to make payments that should remain the same each month for a fixed term and will be set to cover:
- your rent,
- the repayment of some capital,
- and any other charges.
How much deposit you put down will equate to your share of the property until the end of the term, at which time enough capital should have accumulated to buy out the bank’s stake in the property outright, so you can become the sole legal owner.
Diminishing Musharaka
Diminishing Musharaka works slightly differently from Ijara in that you and the bank are co-owners of the property, and your share will increase gradually as you make repayments.
Your repayments will cover:
- your rent,
- the repayment of some capital,
- and any other charges
Your deposit will determine the stake you hold initially, but as you gain greater ownership, the rental element of your monthly repayment should start to reduce, because the bank will own less and less of the property. Because of this, Diminishing Musharaka is often considered to be similar to a repayment mortgage. It is also the most common form of Islamic mortgage in the UK.
Murabaha mortgage
Murabaha involves the bank buying the property you want and immediately selling it to you for more than it paid. Your monthly payments shouldn’t change for the duration of the term, and what you owe can be paid off penalty-free at any time. The price you pay for the property will depend on your deposit, the repayment term, and the value of the home.
Because you own the property straight away, Murabaha is considered to be a regulated mortgage contract, rather than a home purchase plan (assuming there is a first legal charge over the property). While it might seem the profit a lender makes is against the principles of Islamic law, Murabaha is considered Sharia compliant because a commodity is being sold for money.
In the UK, Murabaha is more commonly used for buy-to-let purposes or to buy commercial property, rather than residential property.
How much deposit do you need for an Islamic mortgage?
It is possible to get an Islamic mortgage with a deposit as low as 5%, but there are more options if you can put down at least 20%. A bigger deposit may also help you qualify for lower rent.
What fees will I pay on an Islamic mortgage?
The fees you can expect to pay with a Sharia-compliant mortgage are broadly similar to those you’d see on a traditional mortgage. This means you should budget for:
- survey and valuation fees
- legal fees for two solicitors (one for you, one for the lender)
- home insurance
- stamp duty
» MORE: Stamp duty calculator
Which banks offer Islamic mortgages in the UK?
There are a handful of banks that offer Islamic and Sharia-compliant mortgages to borrowers in the UK. These currently include Gatehouse, Al Ahli and StrideUp. Other providers such as Heylo Housing and Wayhome offer alternatives to a mortgage, based on shared ownership models.
While there are fewer providers of Islamic mortgages in the UK than for traditional mortgages, more Sharia-compliant lenders are expected to enter the market over the coming years.
It may prove beneficial to use a mortgage adviser or broker if it’s proving difficult to find a lender and Sharia mortgage that is suitable for you.
» MORE: Best mortgage lenders
Can anyone use an Islamic mortgage?
Yes, anyone can use an Islamic mortgage, whether you are Muslim or not. Key to the broader appeal is that Islamic banks must operate in line with certain ethical and social responsibilities if they are to abide by Sharia law – meaning they cannot invest in activities such as tobacco, alcohol, arms, gambling and pornography, which many people may like to avoid.
Islamic mortgage pros and cons
Sharia-compliant Islamic mortgages offer some benefits but have downsides to be aware of too.
Advantages of Islamic mortgages
- You can borrow to buy a home while respecting Islamic law around interest.
- Islamic mortgages are available to Muslims and non-Muslims.
- They offer an ethical way of borrowing.
- Islamic mortgages are regulated by the FCA, so offer the same protection as traditional mortgages.
Disadvantages of Islamic mortgages
- There are fewer Islamic mortgage lenders and plans to choose from.
- They can be more expensive than standard mortgages.
- Islamic mortgages may have higher deposit requirements.
- The rent you’re asked to pay could be higher than usual for your area.
Are there risks involved with taking out an Islamic mortgage?
Even though you’re not borrowing money, it’s important to understand that you could still lose your home if you fail to keep up with the payments on an Islamic mortgage.
Islamic mortgage providers should be regulated by the Financial Conduct Authority (FCA), offering you valuable protection. Yet situations can still arise which are out of your control but might leave your home at risk. These might include if your provider sells the share that it owns to another party or if it goes bust.
Seeking appropriate legal advice when taking out an Islamic mortgage is sensible to try and help protect you from such risks.\
Islamic Mortgage FAQs
Yes, you can expect Islamic lenders to carry out a credit check if you apply for an Islamic mortgage. As with any lender, they need to assess whether you’re likely to be able to afford the repayments on your plan, and a credit check will likely be part of that process.
Islamic mortgages are considered halal mainly because they don’t involve the use of an interest-based loan. By the same token, traditional mortgages are widely believed to be forbidden, or haram, under Islamic law, because they involve the payment of interest on money.
Banks and lenders that offer Islamic mortgages will often get guidance from experts in Islamic law to make sure their plans remain Sharia compliant.
Providers that are offering Islamic mortgages will typically have a panel or committee of Islamic scholars which verifies that their products are compliant with Sharia law. A provider should be willing to share the details of its panel members if you ask, or they might already be available to see on its website.
Providers offering Islamic and halal mortgages should be regulated by the FCA and follow its rules. This means the protection you’re afforded with an Islamic mortgage should be similar to that you’d get with any other mortgage covered by FCA regulation.
You might find that Islamic mortgages are more expensive than other mortgages. Firstly, administration costs tend to be higher for home purchase plans. Secondly, because there are relatively few lenders that offer Islamic mortgages, the intensity of competition typically needed to push costs lower may not be as strong as it could be.
Yes, it is possible to remortgage to an Islamic mortgage from a standard mortgage or switch the other way to a standard mortgage from an Islamic mortgage. As the process may be a little more complicated than a straightforward remortgage, you may want to speak to both your current and new lender first.
» MORE: See current mortgage rates
Yes, there are providers in the UK that offer Sharia-compliant Islamic buy-to-let mortgages.
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