If you're considering purchasing a home, but your religion prevents you from seeking a conventional loan form of mortgage, an Islamic mortgage offers a viable alternative that is compliant with Sharia law. More specialist lenders are offering versions of home purchase plans or halal mortgages, providing people within the Islamic faith a viable way to purchase a home without the need to pay money for money.
We cover everything you need to know about Islamic mortgages, including the different types of how to know if a mortgage is really halal or not. Read on to learn more:
The purpose of Islamic mortgages is to provide an alternative to haram mortgages – where money is effectively exchanged for money due to interest – offering a way for individuals to follow Sharia law while also having the opportunity to become homeowners. By definition, Islamic mortgages are halal as they are created to align with these specific laws and values while still having full regulation and protection through the FCA.
Islamic mortgages abide by Sharia law, in which money is seen as something that should not have a value of its own. As such, the traditional mortgage option, where you loan money from a mortgage lender and pay them interest, is haram to many people within the Islamic faith. It's important to note that Islamic mortgages aren't a type of mortgage. You may also see them referred to as a home purchase plan, which is more accurate for the functionality and process involved in a home purchase.
find me a mortgageWhere a traditional mortgage involves putting down a deposit and taking out a loan, an Islamic mortgage involves making a home purchase plan with a bank that follows Islamic finance rules. Instead of loaning money from a financial institution, these specialist companies buy and own the property you'd like to own in the future. You then pay monthly towards purchasing the property and covering an amount of rent for living within the home before you own it.
The idea of this process is by the end, you'll have repaid the bank in full and own the property yourself without ever having to pay interest. You still pay in instalments each month, but the crucial difference is what you're paying for. Like standard mortgages, halal mortgages usually have a fixed period where rent and payments stay the same but can fluctuate with property value and rising costs.
You can get three primary types of halal mortgages in the UK. These include:
Ijara home purchase plans involve a Sharia bank buying and owning a property of your choice. This property is then leased to you, with monthly payments that cover your rent, repayment of capital, and an amount of profit for the bank. The deposit you place on this plan determines your share of the property until the end of the agreement. At this point, you should have enough capital paid to buy out the bank's stake, becoming the legal owner of the property in full.
An alternative to Ijara, Diminishing Musharaka, connects you and the bank as co-owners of your chosen property. Each month, you make repayments to the bank that increases your stake gradually. The initial stake you have is determined by the deposit you place. As you pay in, your stake increases and your rent reduces until you own 100% of the property.
Murahaba is an option where the bank buys the property of your choice before selling it to you at a higher price than their own purchase. In this agreement, your payment remains equal throughout the term. This payment will depend on your deposit, the property's value, and the repayment length. You can pay what you owe penalty-free at any point. This method is considered a regulated mortgage rather than a home purchase plan as you own your property immediately while still adhering to Sharia law as a commodity is sold for money.
Companies that offer Islamic mortgages typically do so with the support of a committee or panel of Islamic scholars, who aid in verifying compliance with Sharia law. Providers freely share the details of panel member names, either by request or featuring on their website or materials. Working with a mortgage broker with experience in Islamic mortgages can also help ensure that your option is halal and meets all requirements under Sharia law.
Islamic mortgages may cost more depending on similar factors that apply to standard mortgages. For instance, you may need a larger deposit of 20% or more to pass your affordability check for a home purchase plan in the same way you would a typical mortgage to buy a home. Higher administration costs and a smaller selection of providers can also lead to higher costs than a conventional mortgage, where competition is higher, causing prices to be driven down.
If you're looking for a halal mortgage, the best way to find a suitable deal is to work with a qualified mortgage broker. As Islamic mortgages have different requirements under Sharia law, seeking professional advice is helpful for finding mortgage options that meet compliance as part of your religious beliefs.
Our team at WIS is highly experienced as specialist mortgage brokers in Kent with coverage across London and beyond. We offer free advice and zero fees for many of our specialist services. Start by getting in touch with our team directly, and we’ll help you to find a suitable solution for your halal mortgage.
As a mortgage is secured against your home/property it may be repossessed if you do not keep up with the mortgage repayments.
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