Islam forbids interest-bearing loans, so Muslims may prefer to seek a halal alternative when purchasing a property.
There are a range of Islamic mortgage alternatives available, allowing buyers to get on the property ladder while being sharia-compliant.
Discover everything you need to know about Islamic mortgages in our guide below.
In this article:
What is an Islamic mortgage and how do they work?
Sharia-compliant mortgages are really ‘mortgage alternatives’ and function as no-interest home purchase plans.
Though there are several variations across the market, all work in the same basic way: the bank buys the property on your behalf and becomes the legal owner.
Your monthly payments function more like rent, with a portion going towards buying out the property owner’s stake.
Types of sharia mortgage
The three types of halal mortgage alternatives are:
- Diminishing Musharaka
In an Ijara home purchase plan, you make monthly payments that are part rent and part capital to finance your final purchase. This means your ownership share of the property remains consistent throughout the length of the term.
Diminishing Musharaka is a joint purchase agreement between you and your Islamic bank. You pay off the provider’s share in monthly instalments, so your ownership share grows as theirs shrinks.
Under the Murabaha no-interest purchase plan, your sharia-compliant provider buys the property and sells it to you at a marked-up price, which you pay in monthly instalments.
These kind of halal mortgage agreements are rarely seen for UK home purchases, but are sometimes used in commercial property development.
What are the risks of an Islamic mortgage?
Although your chosen bank is the legal owner of the property, you will still need to cover the costs of insurance, general maintenance, and conveyancing and stamp duty on the initial purchase.
You’ll need to add all of these outgoings to the costs of the purchase plan itself (though of course this warning applies with a conventional mortgage too).
It is also worth noting that many Islamic and halal mortgage providers will use LIBOR-pegged values to set your rent, rather than using average levels in your local area as a guide.
How much deposit do you need for an Islamic mortgage?
You will typically need a minimum of 20 per cent deposit to qualify for a halal mortgage alternative.
You will also need to budget for surveys, building insurance, stamp duty and any other costs, such as mortgage broker fees and legal costs.
Being a sharia buyer – where to find your Islamic mortgage
You can find sharia mortgage alternatives at many UK banks and building societies, not just those who specifically describe themselves as Islamic banks.
Among the three main types of purchase plan covered here, there are lots of individual no-interest products available, so it’s well worth shopping around for the best deal.
A halal mortgage broker specialist with experience of this type of mortgage alternative can help you choose between the many different products available.
Your broker can also assist you when it comes to remortgaging, which can be complicated with Islamic mortgages (take a look at our full guide to remortgaging for a breakdown of the conventional process).
Islamic mortgages and home purchase plans are regulated by the Financial Conduct Authority, meaning that all providers are legally required to protect your interests.