Islamic Mortgages

In this article, we’ll explain how Islamic mortgages work, the providers who offer them, and how a specialist broker can help you navigate the process to improve your chances of approval.

If you’re a first-time buyer exploring Islamic mortgage options, you may also find our first-time buyer mortgages page helpful for additional advice and guidance on getting onto the property ladder.

What is an Islamic mortgage?

An Islamic mortgage is a halal way of purchasing a property in the U.K. They are considered an alternative to conventional mortgages for Muslims seeking a Sharia-compliant form of finance.

How do they work?

These mortgages are sometimes called a Home Purchase Plan (HPPs). Rather than fitting the classic mortgage definition, they’re a business partnership between an individual and a bank or lender. There’s a reason for this.

One of the guiding principles of the Islamic faith is that making money from money is forbidden. Wealth creation is permissible only if it is based on fair trade, where the risks and rewards can be shared. So, any form of finance that requires paying interest on money borrowed—like a traditional mortgage—falls outside the parameters laid down by sharia law.

So, an Islamic mortgage isn’t a mortgage at all. Rather than lending someone money and charging interest on this amount, a bank will purchase a property on a buyer’s behalf (becoming the legal owner). The buyer agrees to make monthly payments to the lender, including capital and rental, for a specific term. At the end of the term, legal property ownership passes over to the buyer.

Islamic mortgages are still considered niche, with only a select group of lenders (see section below) currently able to provide them. To find out more, your best bet is to use a specialist broker who will already have a firm grip on how they work, who offers them and how you can get one that’s fully compliant with Sharia law.

Using our unique advisor-matching service, we can introduce you to an appropriate professional experienced in all forms of Islamic finance who can help you through this process.

Types of Islamic mortgages

There are three types of Islamic mortgages available in the UK, each offering a slightly different approach:

Diminishing Musharaka (partnership)

Diminishing Musharaka is the most common form of Islamic mortgage that sticks closest to the traditional concept of how a Home Purchase Plan (HPP) typically works.

It’s a co-ownership agreement between a borrower (you) and a bank in which you make a joint purchase, with each of you owning a share of a property from the outset. Your deposit is your initial share; the remaining share belongs to the bank.

To buy the remaining shares and own the property outright, you make monthly payments consisting of rent and capital, which are used to purchase the shares owned by the lender over a specific term (usually 25 years, similar to a traditional mortgage).

So, for example, if you want to buy a house for £200,000 with a £40,000 deposit and use this type of Islamic mortgage for the remaining £160,000, your initial share would equate to 20%, and the lender would own 80%. Your shares gradually increase, and the lenders diminish as you make more monthly payments (hence the term ‘diminishing’).

In a nutshell, this type of Islamic mortgage is the Sharia-compliant equivalent of a repayment mortgage.

Ijara (leasing)

An Ijara arrangement is based on the ‘lease to own’ principle. Once you find a house you want to buy and have agreed on the price with a vendor, your bank will purchase it on your behalf, becoming the legal owner of the property.

You pay a deposit to the lender (typically between 10% and 20%), and this becomes your share of the property, which does not change until full repayment of the outstanding balance is made.

Your monthly repayments consist of two elements: capital and rent. The amount of rent you pay remains constant throughout the agreement’s term. The capital element accumulates until it is sufficient to pay the outstanding balance.

When the capital has been fully repaid, the legal ownership is transferred to you at the end of the term. An Ijara arrangement is the Sharia-compliant equivalent of an interest-only mortgage.

Murabaha (profit)

This type of Islamic mortgage is most commonly used for purchasing commercial property. A mortgage lender buys the property on your behalf and immediately agrees to sell it to you for a higher price.

Suppose you find a property with a sale price of £500,000 and want to buy it using the Murabaha method. The lender will buy it for you at this price and sell it for, say, £600,000 on a deferred payment basis. You can repay the amount owed over a fixed term, but the property will be legally yours from the outset.

The lender’s profits are acceptable under Sharia law as this is viewed as a fair trade transaction rather than money being made from money.

Although the three types of Islamic mortgages approach each other differently, they all share the same guiding principle: to provide a range of alternatives to interest-bearing loans. This is why they’re referred to as mortgage alternatives.

Deciding which option may be right for you can be quite tricky. An experienced Islamic mortgage broker will be able to help fill in all of the blanks so you can make a choice that best suits you. What’s more, they can make sure the deal is fully Sharia-compliant, negotiate with the lender on your behalf and help you with all the paperwork.

How and where can you get one?

Currently, there are four major providers of Islamic mortgages in the UK, and the advisors we work with have deep working relationships with them.

The Islamic mortgage market is growing constantly, and more providers, such as Stride Up and Habib Bank, are looking to launch their own suite of products soon.

The application process

These are the recommended steps to follow when applying for an Islamic mortgage…

Step One: Do your homework

A good place to start would be to familiarise yourself with the types of Islamic mortgages available and read up on the risks involved. This article has you covered on both of these fronts, but if you’ve already done your research, skip to step two.

Step Two: Get your paperwork ready

You’ll need to produce various documents, including ID, proof of income, evidence of deposit funds, and at least three months’ bank statements. Having this paperwork ready in advance can help you save time on your mortgage application.

Step Three: Speak to a broker who specialises in Islamic mortgages:

The more a market grows, the more beneficial it becomes for a consumer, as there’s naturally going to be more competition and more choice.

This is where the services of a broker who’s not just experienced in Islamic mortgages but also has a firm understanding of the needs of the Muslim community and Sharia law become quite crucial.

If you contact us, we can arrange for a specialist in Islamic finance to speak with you in more detail and provide the specific advice and guidance you’re looking for.

Deposit, fees and costs

Deposits for Islamic mortgages can vary anywhere from as low as 5% up to 20%, depending on the lender and your specific circumstances. The more deposit you can put down, the lower your monthly payments will be and the better your chances of landing a favourable deal.

In addition to your deposit, there are also the following costs you’ll need to budget for, all of which are what you’d expect to find when buying a property:

• Legal fees (both for yourself and for the lender)
• Survey and conveyancing
• Stamp duty (if applicable)
• Buildings and contents insurance

Are these mortgages more expensive?

This depends on the lender you’ve chosen for your Islamic mortgage and the terms they can offer. It has been known that this type of finance incurs higher administration fees and requires larger deposits than you’d find for conventional mortgages.

An experienced Islamic mortgage broker can highlight lenders who offer the best terms while incurring lower overall costs. They can also identify deals where deposit requirements are not so restrictive.

Buy-to-let Islamic mortgages

A buy-to-let property is still considered a lucrative investment. The good news is that Islamic mortgage providers offer specific options if you want to pursue this type of opportunity. The market for this is very small, so you’d be limited to just a handful of niche lenders, but the advisors in our network have deep working relationships with them and could negotiate a deal on your behalf.

The deposit required, and fees will differ depending on the lender you choose. Again, an experienced broker’s advice will be invaluable, potentially saving you time and money by guiding you through the deals currently on offer.

What are the risks involved?

Although an Islamic mortgage doesn’t involve any borrowing, the risk of repossession still exists if you don’t keep up with your monthly payments.

A lender may be viewed as taking on more risk by buying a property on your behalf. This means they’re allowing you to stay in their property as long as you keep up with the rent payments. If you fall behind, they can take necessary action.

The Islamic mortgage specialists within our network can explain the repossession guidelines for all lenders before you decide on one.

Get matched with an Islamic mortgage advisor

There’s a lot to consider when you’re searching for an Islamic mortgage, so it’s important to find an advisor who’s experienced in this type of finance and also understands the process of purchasing a property.

This is where we can help. Our free advisor-matching service is designed to pair you with a mortgage broker who will assess your circumstances and requirements so they can be best placed to help you achieve your goals. This will be someone we’ve chosen, based on your specific needs and their experience of arranging Sharia-compliant mortgages.

Call 0330 818 7026 or make an enquiry, and we can arrange a free, no-obligation call with an Islamic mortgage specialist today.