How does an Islamic mortgage work? | WIS Mortgages
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How does an Islamic mortgage work?

If you are struggling to find a mortgage that works for you and have been looking for a more ethical way of financing your home, there are alternatives to traditional mortgages that you might want to consider. One of these is an Islamic mortgage. But how does an Islamic mortgage work, and who can apply for one? Read on to find out.

Why are Islamic mortgages important?

The most important factor that makes Islamic mortgages important is their implications for religious people. For Muslims, charging interest or paying it is banned under the Islamic law of Shariah. Because of this, Muslim people are not allowed to take out repayment or interest-only mortgages. This makes it very difficult for people who practice Islam to be able to buy a house, hence the need for Islamic mortgages.

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How does an Islamic mortgage work?

The key thing that makes an Islamic mortgage different is the way in which the home is bought. Since those who practice Islam can't borrow or lend money in a trade for interest, under an Islamic mortgage, the bank buys the property outright instead. The bank will then become the sole owner of the property and, in effect, rent it out to the 'owner'.

You can make monthly payments in the same way, which will contribute towards the total cost of the house. As you continue to make payments, the amount of the house you own grows while the amount the bank owns gets smaller. By the end of the contract, you will either completely own the house or have a final sum left to pay in order to own it.

In effect, the interest has been replaced with rent, which means that no Islamic laws are broken and you can pay for your home in a way that means you are never in debt.

Who can apply for an Islamic mortgage?

Despite the name, anybody can apply for an Islamic mortgage. You don't have to be Muslim or of any specific religion to apply. Islamic mortgages might be a good option for you to look into. This is a great alternative to traditional mortgages for anyone looking to buy a new property.

What are the potential risks of an Islamic mortgage?

At this point, you may be wondering why Islamic mortgages aren't more common. There are a few reasons why they could be less attractive than traditional mortgages.

Firstly, since there are limited providers and therefore not enough competition to force down prices, these mortgages can be more expensive. It's also fairly common for the amount of deposit you will need to put down to be higher for an Islamic mortgage.

Another drawback is that there are concerning consequences if you miss or are late with one of your payments. Since the bank has bought the property and you are, in effect, renting it, if you miss your payments, you will face fines and eventually could find yourself being removed from the property as your home may be repossessed.

For this reason, it is important that you are on top of your finances and are certain that your circumstances won't change if you are planning on taking out an Islamic mortgage. The last thing you want is to put everything you have into a home and then find yourself unable to make payments and being stuck back where you started.

What other costs might apply?

There are admin fees that you will have to pay, but this is the same as any other mortgage (conveyancing, survey fees etc). Another fee you will have to consider is stamp duty. Previously, you had to pay it twice on an Islamic mortgage - when the bank bought the house on your behalf as well as when they sold it on to you. However, in 2003, the law was changed so that this doesn't occur and you only pay once.

What to do next

So, now you know the answer to 'how does an Islamic mortgage work?', you're probably wondering what the next steps are.

There are lots of smaller costs and fees involved in buying a house that can be easy to overlook. So, if you are thinking about buying a house but are unsure of the fees involved or how much you will be able to spend, make sure to get in touch with us for some free advice or use our mortgage calculators to get a better understanding of your position.

If you are still not sure what you can afford or which option is best for you, don't worry. We're here to help and we would be more than happy to offer you as much advice as you need.

As a longstanding mortgage advisor, our company values your experience and can offer you the most suitable advice on first-time buyer mortgages, expat mortgages, contractor mortgages, SPV mortgages, buy-to-let mortgages, mortgage insurance, and limited company mortgages. If you want to know more, contact us today and make the most of our free advice and zero fees. If it's more specific help you need, we even offer specialist mortgage products for high earners as well as information on green mortgages so you can be sure that we can help you.

We also have support available for your accountancy needs via WIS Accountancy and for any insurance queries and help via WIS Business Protection. Accountancy is not regulated by the FCA.

When applying for a mortgage, it should be considered that a mortgage is secured against your home or property and therefore it may be repossessed if you do not keep up with the mortgage repayments.

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