Islamic Mortgages

What is an Islamic mortgage?

Also known as ‘halal mortgages’, Islamic mortgages are mortgages that are compliant with Sharia law.

Muslims may prefer to seek a halal alternative when purchasing a property as Islam forbids interest-bearing loans. Sharia-compliant mortgages use ‘no interest’ plans that allow Muslims to purchase homes without compromising their religious beliefs.

At the end of the term, you should have bought the property back, or have an outstanding sum left to settle before officially becoming the legal owner.

Types of Sharia Mortgage

There are three types of Islamic mortgage alternatives:

• Ijara
  An Ijara home purchase plan is where you make monthly payments that are part rent and part capital to finance your final purchase of the property
  
• Diminishing Musharaka
  A Diminishing Musharaka is a joint purchase agreement between you and your Islamic bank. You will make monthly payments to pay off the provider’s share meaning your ownership grows as theirs reduces
  
• Murabaha
  Your sharia-compliant provider buys the property and sells it to you at a marked-up price which you pay in monthly installments

What are the risks of an Islamic mortgage?

Despite the bank legally owning the property, you will still be required to cover the costs of insurance, maintenance and conveyancing, and stamp duty on the initial purchase.
You’ll need to add all of these costs to the purchase plan which of course applies to a conventional mortgage as well.

How does Sharia finance differ from conventional finance?

The key differences between Sharia and conventional finance are:

• Finance and investments are not to be used to support industries or activities that are against the Shariah principles. These include alcohol, tobacco, pork, non-halal meat, gambling, adult entertainment, etc.
  
  
• Money must be used to generate profit supported by a genuine trade or business-related activity. Giving or receiving interest is prohibited.

Is Shariah finance just for Muslims?

No. Sharia-compliant products and services are available to everyone and suitable for both Muslims and non-Muslims. Many non-Muslims believe in Sharia-compliant products and services because they view them as ethical, fairer, and more socially responsible.

Do only foreign banks offer Sharia-compliant finance in the UK?

No. There are several banks that offer Sharia-compliant products to UK customers.