What is an Islamic mortgage?

An Islamic mortgage is that which is compliant with Islamic law, often referred to as Sharia law. The main difference being is that an Islamic mortgage is not inclusive of interest as this is forbidden under Islamic belief. In reality it is not really a mortgage but a no interest Home Purchase Plan (HPP). In practice, the home is purchased by the lender and a lease agreement is drawn between both parties.

How does it work?

There are many different variations, however, they all HPP’s tend to follow the same general rules. A lender will purchase the property on the client’s behalf and will have legal ownership. The lender will then request monthly payments be made in the form of rent with a percentage of each payment going towards the purchase of the property from the bank. In essence, the bank will replace any interest with rent and so effectively in Islamic law, it becomes lawful.

Upon conclusion of the mortgage, the full amount will be repaid or there will be an outstanding balloon payment which needs to be made before obtaining full ownership.

Are there different types of Islamic mortgages?

There are several different types of Islamic mortgages available:

• Ijara (lease)- The bank will purchase the property and lease it on an agreed monthly fee over a fixed term. Upon conclusion of the term, full ownership will be transferred to the borrower.

• Musharaka (partnership) - This is a co-ownership agreement where collectively with the bank both parties own a separate share of the property. Following each subsequent monthly payment, more of the property is owned. Consequently, the monthly rent reduces as the share in the property increases until the property is collectively owned by the borrower.

• Murabaha (profit) - The lender will purchase the property on behalf of the borrower and sell to them at a greater price. The higher price is then repaid in equal instalments over a fixed term. This form of mortgage product is mainly commonly used to finance commercial properties.

Is it Sharia law compliant?

Usually most lenders who offer this type of mortgage will typically be able to evidence confirmation or compliance from an Islamic authority.

A large array of lenders now supply Sharia compliant mortgages which are also protected by the Financial Conduct Authority (FCA), as traditional mortgages are.

Are Islamic mortgages more expensive?

Islamic mortgages to tend to be more expensive due to the additional administration costs incurred by the lender. Also being that it is a niche market and therefore there isn’t as much competition in the market in comparison to other products.

Traditional mortgages can begin at a 5% deposit whereas an Islamic mortgage can be anywhere in the vicinity of 10% and 35%.  However, this will vary between lender to lender.

What are the risks?

Despite being an ethical alternative for the Muslim population, there are still risks entailed.

It seems you may be sharing the risk equally with the lender but this is not the case. If a repayment is late or missed it can result in fines which will subsequently result in the property being repossessed. When taking an Islamic mortgage we always recommend you understand the consequences for failure to meet any payments due.

Which lenders provide Islamic mortgages?

Islamic financing is becoming increasingly popular in the United Kingdom. Usually a mortgage broker will be able to arrange as such via one of the below main providers:

• Al Rayan Bank (formerly Islamic Bank of Britain)

• Ahli United Bank

• Gatehouse Bank.

Many other providers also offer Islamic products so it is important to shop around and ensure you find the best deal. It may be worth consulting a specialist mortgage broker who has experience with such mortgages to allow them to find the perfect product for you.

Can anyone apply?

Whilst anyone can apply they are aimed at Muslims who are looking to purchase property whilst ensuring it does not cause any conflict with their faith.

Are there any additional fees compared to a traditional mortgage?

The fees tend to remain the same. The same usual costs are still incurred such as SDLT, legal fees and any fees for surveys.

Please contact us for further information if you wish to purchase a property using Islamic financing.