Is an Islamic mortgage halal or haram?

Understanding Sharia-Compliant Mortgage Options

Mortgages, by their very nature, are interest-bearing products. This means that according to the Islamic faith they are considered haram, an Arabic term meaning forbidden. As a result, many people believe that any kind of mortgage should be considered haram according to Muslim teaching. However, Islamic mortgage products have been developed in consultation with Muslim scholars to address the issue, enabling faithful Muslims to purchase property. Despite this, many Muslims still wonder if an Islamic mortgage is halal or haram, and how they differ from traditional interest-bearing mortgages.

Here’s everything you need to know.

Why is interest haram?

Interest or Riba is strictly forbidden within Islam. Interest is the amount above the loan received by the individual or company that lends money. At its core, the principle refers to the unequal exchange of fees resulting from borrowing money, particularly if that exchange is exploitative.

While any mortgage should not be exploitative, the practice of interest being added to a loan does mean that a traditional mortgage will usually be considered haram. As well as mortgages, this principle might also be applied to a loan used to purchase goods and services, insurance policies and loans to cover student fees. A range of Islamic finance products have been developed to meet the needs of faithful Muslims in the modern world.

Is an Islamic mortgage halal or haram?

Islamic mortgages are considered halal and have been carefully developed in line with Islamic teaching to ensure that they are not inadvertently haram. This means that when you use an Islamic mortgage to facilitate a property purchase you will be acting within the teachings of the Islamic faith.

What is an Islamic Mortgage?

Islamic Mortgages are mortgages structured to be fully compliant with Sharia Law. Unlike traditional mortgages, they don’t incur interest. Islamic or Sharia mortgages are sometimes referred to as Home Purchase Plans (HPP), and there are three different types. Each type is structured slightly differently. To qualify for an Islamic Mortgage, you will generally need a larger deposit than is typical for traditional mortgages, with 20% being common.

What are the three types of Islamic Mortgage?

Ijara

An Ijara product involves the bank purchasing the property and leasing it to you at a monthly cost. When the lease term ends, ownership transfers to you.

Musharaka

This is an agreement where both you and the bank own a share of the property. Your monthly payments consist of rent and capital, gradually purchasing the bank’s share until you fully own the property.

Murabaha

The bank purchases the property on your behalf and sells it to you at a higher fixed price over a term. Payments are equal instalments and not subject to interest.

How do you know that an Islamic mortgage is Sharia?

Lenders should demonstrate that their Islamic mortgages comply with Sharia guidance, usually certified by an authority in Islamic law. Many providers are regulated by the FCA, and Islamic mortgage holders have the same protection as other mortgage products.

Are Islamic mortgages more expensive?

Sharia-compliant mortgages often require larger deposits and higher administration costs, making them more expensive than traditional mortgages. An Islamic mortgage calculator can help estimate monthly payments.

Are there any risks in taking out an Islamic mortgage?

The bank legally owns the property, but you are responsible for insurance, conveyancing, stamp duty, and maintenance. Some providers peg rent to LIBOR, which may increase your costs above local market rates. Affordability calculators can help assess realistic repayments.

Flexible, ethical products

Islamic mortgages are flexible, ethical products suitable for anyone wanting to follow Sharia law or those preferring an alternative to traditional mortgages.

Comprehensive mortgage advice

WIS Mortgages provides advice across a range of products in London, Kent, Buckinghamshire, and the UK. Specialist advice for contractors is also available. Contact us for more information.

As a mortgage is secured against your home/property, it may be repossessed if repayments are not maintained.

Frequently Asked Questions

Are mortgages haram?

Traditional interest-bearing mortgages are considered haram because they involve Riba (interest), which is forbidden in Islam.

Are Islamic mortgages halal?

Yes. Islamic mortgages are structured in accordance with Sharia law, avoiding interest, and are considered halal.

What types of Islamic mortgage are available?

The main types are Ijara (lease-to-own), Musharaka (shared ownership), and Murabaha (cost-plus sale), each structured differently to comply with Sharia.

Are Islamic mortgages more expensive?

Islamic mortgages often require larger deposits and may have higher administration costs, making them more expensive than traditional mortgages.

How do I know if a mortgage is Sharia-compliant?

Lenders offering Islamic mortgages should provide Sharia compliance certification from recognized authorities. Many providers are also regulated by the FCA.