Natalie An Islamic mortgage, also called Islamic home financing or Sharia-compliant mortgage, is a type of home loan that complies with Islam. Islamic loans operate differently from the high-street version most people apply for in that they comply with principles prohibiting riba (interest).
There are various types of halal mortgage products based on fundamental principles of Islam. These products prohibit riba (interest), gharar (excessive uncertainty), and investments in haram (forbidden) activities like alcohol or pork. Instead of regular mortgages, these mortgages use other structures like Murabaha (cost-plus financing), Ijara (leasing), and Musharaka (partnership). Let’s look more into this form of home ownership for Muslims.
What is an Islamic Mortgage?
Key features of this halal alternative are the property in partnership structure between the buyer and bank during the finance period. Instead of lending money to Muslims to purchase a house, the bank acts as a partner and buys on their behalf. The buyer and bank enter into shared ownership agreements, but the owner handles the upkeep and monthly costs. The buyer gradually buys the bank’s share through staged payments and a marked-up price.
Staged payments function more like rent rather than interest payments. A portion of monthly payments goes towards paying rent, while the remaining portion goes towards gradually repurchasing the house. Each payment reduces the bank’s share and increases the buyer’s share until the buyer becomes the sole owner.
Types of Islamic Home Financing Models
There are three main product types, and each has different terms and conditions for the repayment term. All align with Muslim beliefs and require mortgage application processes. All three focus on co-ownership.
Ijara (Islamic Leasing)
The compliant mortgage of Ijara is when a bank buys the property and leases it to their customer. The customer pays mortgage repayments, but the bank retains ownership throughout the lease period.
The Ijara process begins with customers identifying a property they wish to buy. The bank then pays the property price. The customer enters a lease agreement agreeing to pay for a specified period, typically 5 to 30 years. Monthly instalments are usually a percentage, which changes depending on the Bank of England base rate.
During the lease term, the customer lives in the property and is responsible for its maintenance and upkeep. Fixed monthly rental repayments are based on property value, lease term, and prevailing market rates.
At the end of the lease term, the customer assumes property ownership, usually through a sale transaction as a “gift” or “sale contract.” The customer owns the house after completing payments for the rental instalments.
Diminishing Musharaka (Partnership)
The diminishing musharaka structure adheres to Islamic home purchase plans, allowing individuals to acquire property aligned with their Muslim beliefs. This structure involves a joint ownership agreement between the individual and the Islamic bank, where both parties become co-owners/
Under this arrangement, the individual pays a monthly instalment for two components. The first portion is rent, which gradually decreases. The second is payment toward the individual’s share, which increases concurrently. As the rent portion decreases, the individual’s ownership percentage grows, resulting in full property ownership.
Changing ownership shares are based on the monthly repayments and the agreed ratio. The individual’s share typically increases monthly while the bank’s share decreases. An initial deposit or down payment initiates this arrangement, demonstrating the individual’s commitment to the purchase.
Murabaha No-Interest Purchase Plan (Profit)
The Murabaha process starts with the borrower identifying a property they wish to purchase. The bank then buys and sells the property at a higher price, which includes a profit margin. The customer makes regular payments to pay off the debt.
However, this type of mortgage isn’t used for residential home purchases for several reasons. Instead, they usually cater for commercial properties or bridge financing situations. Firstly, the process involves the bank owning the property before selling it back, which creates additional complexity and legal obligations. Additionally, the higher price at which the property sells makes Murabaha finance less affordable than traditional mortgages. Consequently, many individuals opt for conventional interest-based mortgages, widely available and often cheaper for residential property purchases.
What are the Risks of Islamic Home Financing?
Also called a no-interest home purchase plan, there are potential risks that mortgage advisors should make the consumer aware of. One risk is lenders’ higher fees because they operate under different frameworks. They typically require a minimum deposit of 15%. This higher deposit is challenging for some borrowers, especially first-time buyers or those with limited savings. It may take longer to get the necessary funds, delaying the purchase of a home.
Furthermore, the complexity of conveyancing leads to higher solicitor fees. Islamic financing requires more intricate legal processes and mortgage applications. This complexity increases legal costs, putting an additional burden on the borrower.
Limited options for halal mortgage providers are risky. While the market is growing, there are still fewer options than conventional mortgages. This limited choice may mean borrowers settle for less competitive rates or terms.
Lastly, the responsibility of homeownership is on the borrower without legal ownership. The financial institution purchases the property and leases it back to the borrower, who eventually makes monthly payments to gain full ownership. This term is risky for borrowers if they fail to meet their obligations, potentially resulting in losing their homes.
How Much Deposit Do You Need?
The typical deposit required for halal alternatives will vary between lenders and products, and you should find one that best suits your financial situation. Generally, higher deposits offset the interest-free conditions in compliance with Shariah law. Many providers offer a free Islamic mortgage calculator to help people make decisions.
Options are also available for home purchase plans with a minimum 5% deposit. Some lenders cater to individuals who may not have substantial savings for a larger deposit. These products provide accessibility and flexibility.
Being a Sharia Buyer – Where to Find Your Islamic Mortgage
Various providers take roughly 4 to 8 weeks to approve. Look at UK conventional banks. Many mainstream banks now offer Islamic products alongside standard mortgages. They cater to the growing demand from Muslim consumers who wish to get their foot on the housing ladder. Based in London, Gatehouse Bank is a prominent financial provider. Otherwise, building societies are often more community-oriented and may better understand the specific needs of Muslim homebuyers.
Another source to explore is Islamic banks. These banks know compliance guidance and offer various financial products. Consulting a specialist broker could also be advantageous. They provide valuable advice based on their expertise so you can make an informed decision. Don’t forget to factor mortgage broker fees into the overall costs.
Where Can I Get a UK Islamic Mortgage?
The Bank of London and the Middle East (BLME) offer shared ownership models, including Murabaha and Ijora. Abu Dhabi Islamic Bank (ADIB) provides various mortgage products for home buyers. Al Rayan Bank is known for its home financing options, including fixed-term and variable-rate products.
HSBC Amanah is a part of HSBC, while Wadiah Finance also provides different types of compliant mortgage solutions. Check with local mosques or community centres, as they may have resources or recommendations for co-ownership agreements and compliant lenders.
Also, look for Habib Bank, which has operated in the UK since 1961. The new name is HBL Bank, and they are a branch of Habib Bank based in Pakistan. ABC International Bank belongs to the parent Arab banking corporation. Ahli United Bank is another option. Check their websites to find the bank with branches near you; however, all offer online banking services and customer service channels.
Also, Look Online at Tembo
Tembo, a leading financial institution, offers funding based on religious beliefs. Individuals benefit from personalised solutions tailored to specific requirements by partnering with Tembo. They say, “The Islamic Council of Europe or Amanah Advisors approves all Sharia-compliant schemes listed below.”
One product, Stride Up, allows potential buyers to purchase a share of a home and gradually increase their ownership over time through a process known as staircasing. The ownership structure of Stride Up’s home purchase plan is based on a shared equity model. Initially, buyers can purchase a stake starting from as little as 5%.
One unique feature of Stride Up’s plan is the option for overpayments. This feature allows buyers to make additional contributions to increase their ownership stake at any time and build equity in their homes at an accelerated pace.
Is a Mortgage Allowed in Islam?
Traditional mortgages involving monthly interest instalments are not permissible in Islamic finance. However, Islamic financing options operate on a different model than interest and are acceptable. Instead, Islamic mortgages operate on the principle of joint ownership between the buyer and the lender. The lender purchases the home, and the buyer gradually repays the loan, acquiring full ownership upon payment completion. This way, the customer doesn’t engage in interest payments, going against the principles of Islamic finance.
Is Shared Ownership Halal?
Shared ownership is permissible and halal because the homebuyer and bank enter joint ownership agreements instead of borrowing money. The bank provides a portion of the purchase price, and the homebuyer pays rent until they own the entire property. However, shared ownership arrangements carry a higher risk. Additionally, the costs of structuring halal finance may be higher due to the need for contract experts and scholars.
How Can I Check if the Product is Sharia-compliant?
- Familiarise yourself with key concepts like riba, gharar and haram activities.
- Identify the mortgage rate structure. Standard models include Cost-plus financing, Lease-to-own arrangements, and Joint partnerships in property ownership.
- Ask the provider if they have the backing and approval of a qualified Sharia board or scholar.
- Also, read the terms and conditions to ensure everything adheres to the main principles.
- Make sure payments reflect profit-sharing or lease agreements.
- Check the finance does not fund activities or businesses considered haram (e.g., alcohol, gambling).
- If in doubt, consult a qualified scholar or financial advisor specialising in Sharia finance.
Is there a credit check on Islamic mortgages?
Yes, there is. There will also be a risk profile assessment, especially on expensive property. Lenders will assess your credit history to evaluate your ability to repay funds. While the process includes a credit score, it should align with Sharia principles, focusing on your financial situation rather than penalising you for past issues.
Can Anyone Apply?
Yes, anyone can apply, but there are specific eligibility criteria. Applicants usually need to be residents and have a valid address. Most lenders require applicants to be at least 18 years old. You must demonstrate a stable income to meet affordability criteria. While Islamic mortgages involve a credit check, some lenders may be more flexible with past credit history issues, focusing on overall financial health.
The house must meet specific criteria, often a residential home rather than a buy-to-let or commercial property. The application must align with Islamic principles, meaning the funds should not involve interest (riba) or haram activities. Don’t forget that you will also need to pay extra costs alongside the initial purchase, like administration costs and building insurance.
About Us – Spot Blue
We are Spot Blue, and we sell many properties in the UK and worldwide. If you would like more information on an Islamic mortgage and how to use one to become a property owner, contact us today. Also, see our range of property for sale in the UK here. Islamic home financing as a Muslim is an excellent way to become a property owner.
