fbpx Mortgages and Furlough: How to get a mortgage after being on furlough. Read more Chevron
Arrow Arrow
Scroll to top

No impact on credit score

Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: August 27, 2021

Devout Muslims often need a special type of mortgage to buy a property ladder, one which is fully compliant with Sharia law. But how exactly do Islamic mortgages differ from other types of borrowing? More importantly – how can you get one?

In our guide to Muslim mortgages, we answer these questions and more, and also tell you how to find a broker who specialises in Sharia-compliant mortgages.

What is an Islamic mortgage and how do they work?

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.

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

One of the guiding principles of Islamic faith is that making money from money is forbidden. The creation of wealth is permissible only if based upon fair trade where the risks and rewards can be shared. So, any form of finance which involves a requirement to pay interest on money borrowed – like a traditional mortgage – falls outside the parameters laid down through sharia law.

So, in effect, 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 consisting of capital and rental for a specific term. At the end of the term legal ownership of the property passes over to the buyer.

Islamic mortgages are still considered quite 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 will be able to help you through this process.

Types of Islamic mortgages

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

  • Diminishing Musharaka (partnership)
  • Ijara (leasing)
  • Murabaha (profit)

Diminishing Musharaka (partnership)

Diminishing Musharaka is the most common form of Islamic mortgage, and of all three types available is the one which sticks closest to the traditional concept of how a Home Purchase Plan (HPP) typically works.

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

In order to buy the remaining shares, so you can 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 owns 80%. Your shares gradually increase and the lender’s 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

An ijara arrangement is based on the principle of ‘lease to own’. Once you find a house you want to buy, and have agreed 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 anywhere between 10%-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 term of the agreement. The capital element will accumulate until it is sufficient to pay the outstanding balance.

At the end of the term, when the capital has been fully repaid the legal ownership is transferred over to you. 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.

Let’s say 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 to you for, say £600,000 on a deferred payment basis, so you can repay the amount owed over a fixed term but the property will be legally yours from the outset.

The profits made by the lender are seen as acceptable under sharia law as this is viewed as a fair trade transaction, rather than money being made from money.

All three types of Islamic mortgage are quite different in their approach but all have the same guiding principle, which is 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 of the paperwork.

Feefo badge

How, and where can I get an Islamic mortgage?

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

The Islamic mortgage market is growing all the time with more and more providers, such as Stride Up and Habib Bank, looking to launch their own suite of products at some point in the near future.

Going directly to a lender is obviously an option available to you. However, bear in mind that the lender you approach will only speak to you about their own range of products whereas an independent mortgage broker who specialises in sharia-compliant deals would be able to advise on the whole market.

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 becomes quite crucial.

If you get in touch 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 for Islamic mortgages

Deposits for Islamic mortgages can vary anywhere from as low as 5% up to 20%, depending on the lender and your specific circumstances. Obviously 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’s 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 Islamic mortgages more expensive?

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

An experienced Islamic mortgage broker would be able to highlight those lenders who offer the best terms, whilst incurring lower overall costs. They will also be able to identify any deals where deposit requirements are not so restrictive.

Buy to let Islamic mortgages

A buy-to-let property is still considered a lucrative investment and the good news is there are Islamic mortgage providers who 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 involved will differ depending on the lender you choose. Again, this is where an experienced broker’s advice will be invaluable, saving you both time and money, potentially, by guiding you through the deals currently on offer.

What are the risks involved with Islamic mortgages?

Despite the fact an Islamic mortgage doesn’t actually 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 of the risk by buying a property on your behalf. In effect 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 requisite action.

The Islamic mortgage specialists within our network will be able to talk you through the repossession guidelines for all the lenders before you make a decision on which one to opt for.

Get matched with an Islamic mortgage advisor

There’s a lot to think about when you’re searching for an Islamic mortgage, that’s why it’s important to find an advisor who’s experienced in this type of finance and also understands the process for 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 they’re experience of arranging sharia-compliant mortgages.

Call 0808 189 2301 or make an enquiry and we can arrange a free, no-obligation call with an Islamic mortgage specialist today.

FAQs

Are Islamic mortgages regulated?

Yes they certainly are. As with traditional mortgages, islamic mortgages are regulated by the Financial Conduct Authority (FCA). So, you get the same level of protection regardless of which type you choose.

Is an Islamic mortgage halal or haram?

In the U.K, Islamic mortgages are considered halal (permissible under Islamic law). This is due to their status as home purchase plans, rather than interest-bearing loans.

With a traditional mortgage you’re paying interest on the amount you’ve borrowed, therefore, this type of finance would be viewed as haram (forbidden).

Are Islamic mortgages only available to Muslims?

No, not at all. Islamic mortgages are available to anyone, Muslims and non-Muslims. If you’re non-Muslim and looking for a more ethical form of finance or simply like the idea of a Home Purchase Plan then you can apply for one.

How do I know my Islamic mortgage is sharia-compliant?

Every Islamic finance provider uses a panel of scholars who guide them on all matters relating to sharia law and will be able to provide evidence of their approval for these types of products.

Do Islamic mortgage lenders conduct credit checks?

Yes they do and these credit checks will follow the same guidance as conventional mortgages as the lender still needs to ensure that you will be able to maintain your monthly payments during the term.

Can I use the Help-to-Buy scheme for an Islamic mortgage?

Yes you can. If you opened a Help to Buy ISA account before they closed you can still use the money you’re saving towards a deposit for an Islamic mortgage and this will benefit from a top-up from the government.

For every £200 you save each month, the government adds a further £50 up to a maximum of £3,000.

Ask a quick question

We know everyone's circumstances are different, that's why we work with mortgage brokers who are experts in all different mortgage subjects.

Ask us a question and we'll get the best expert to help.

1 of 3
£
£
£
2 of 3
3 of 3 Send!

About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

Continue Reading

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

Maximise your chances of approval, whatever your situation. Find your perfect mortgage broker

Get the ‘YES’ you’ve been waiting for 👍

Our broker matching service will match you to a real human being who’s a specialist in your circumstances – for free!

Your expert will find you the best deal that’s right for you and be with you every step of the way.

Get Started