It’s difficult enough for most Britons to get a mortgage, but for British Muslims it can be an even trickier process to negotiate.
It is forbidden under Sharia Law to pay or receive interest. This means that until recent years it was extremely difficult for all but the wealthiest Muslims living in Britain – those who could afford to purchase property outright – to own their own home without acting against their faith.
Sharia-compliant or Islamic mortgages became available in the UK in 2002 at the encouragement of the British government. By the end of 2005 they were offered not only by smaller banks and building societies, but also by several high street banks including HSBC, Lloyds TSB and Natwest.
In addition to not charging interest, Islamic mortgages must also comply with various other aspects of Sharia Law. For example, the money used by the bank to purchase the property must come from activities deemed permissible by Islamic standards. Banks offering Islamic mortgages must not be involved with impermissible activities such as financing companies involved with alcohol, gambling or non-halal meat.
There are two main types of Islamic mortgage available in the UK – Murabaha and Ijara. In basic terms, both involve the lender purchasing a property and either selling it to the buyer at a slightly increased price, or renting it to the buyer over a period of time until the mortgage is paid in full.
For this kind of mortgage, the buyer is required to finance a percentage of the property upfront – typically up to 20%. This option is therefore best for people who are starting out with some capital behind them.
The key benefit of Murabaha mortgages is that from day one, the property officially belongs to you – it’s registered in your name. The repayment period and monthly repayment amounts are agreed between you and the lender. Repayments are fixed for the term of your mortgage. The maximum repayment term is 15 years, and you can repay the loan in full at any point without penalty. How does it work?
How does it work?
Ijara mortgages have proven to be the more popular product available, as there is no requirement for a large initial payment or deposit, and it is a slightly more flexible arrangement.
The main difference between Ijara and Murabaha is that with an Ijara mortgage, the property will not immediately be registered as belonging to you. Instead, you will essentially rent the property from your lender. In addition to the agreed monthly repayment amounts, you will also pay monthly rent to the bank.
At the end of the agreed term or once the purchase price has been repaid in full, ownership of the property is transferred from the lender to you. How does it work?
How does it work?
If you already have a conventional mortgage and would like to replace it with a Sharia-compliant mortgage, the process is fairly straightforward.
The bank will purchase your property from you at its current market value, and you will agree to buy the property back at the same price. While the bank pays off your previous interest-based mortgage, you will make equal monthly repayments to the bank.
While the Islamic finance market in the UK is still developing, there are more and more high street and niche banks offering Sharia-compliant products. You should go further than the high street to do your research and compare prices before making a decision about which lender is best for you.
Any lender to whom you apply will check your credit history through an approved agency, and will also take into account your income, profession and where applicable, the size of your deposit.
In countries where Islamic mortgages have been introduced, they have become a popular choice for both Muslims and non-Muslims alike. Some non-Muslims are attracted to the idea of a mortgage that isn’t interest-based, as well as to the ethical aspects of Sharia-compliant finance.