Guide to sharia law mortgages

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.

    MortgagesIn 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.

    Murabaha (deferred sale finance)

    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?

    1. You choose a property and agree a purchase price with the seller
    2. You apply for a Murabaha mortgage and agree repayment terms with your lender
    3. Your lender will purchase the property and sell it back to you immediately at a slightly higher price that will take into account the value of the property, length of repayment term and amount of your deposit
    4. The property is registered in your name
    5. The sale of the property to you by the bank is recorded in a Murabaha mortgage contract
    6. You make the first payment (deposit) on the day of completion. The deposit is typically 20% of the purchase price.

    Ijara (lease to own)

    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?

    1. You choose a property and agree a purchase price with the seller
    2. You apply for an Ijara mortgage and agree repayment terms with your lender
    3. You agree to pay back the purchase price through fixed monthly installments (usually over a period of 25 years), and also to pay an agreed amount of rent to the lender. The rent amount will decrease annually as you pay off the mortgage itself
    4. Once the purchase price has been repaid in full, the lender will transfer ownership of the property to you.
    Replacing an existing mortgage

    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.

    Who offers Sharia Law mortgages?

    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.

    Who can apply for a Sharia Law mortgage?

    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.