Last reviewed on 18th November 2023 by Martin Alexander (Mortgage Advisor)
Religious values can affect the type of mortgage you’ll need. Islam forbids both paying and receiving interest. So, Muslims who want to comply with Sharia law can get an Islamic mortgage, as it offers a halal way of buying a home.
What is an Islamic mortgage?
An Islamic mortgage is a mortgage that complies with Sharia law. They differ from traditional mortgages, as Islamic mortgages don’t involve the repayment of interest.
Islamic mortgages are sometimes called ‘halal mortgages’ or ‘Sharia mortgages’.
How does an Islamic mortgage work?
Islamic mortgages are similar to no-interest home purchase plans (HPP) as they contain an element of leasing.
A bank will buy the property on your behalf as the legal homeowner. You’ll then pay the mortgage back each month, similar to rent. As you’re not paying interest, it remains a Sharia-compliant mortgage.
Once your mortgage term ends and you’ve made all your payments, you’ll own your home outright.
Types of Islamic mortgages
There are three types of halal mortgages in the UK:
With an Ijara mortgage, your lender buys the property and then leases it to you for a fixed time. You’ll agree to a fixed monthly cost, and once the fixed term expires, you’ll own the property outright.
Musharaka mortgages are a partnership between you and your lender, as you each own a separate share of the property.
Each repayment you make will go towards repaying the outstanding capital and towards rent.
With a Murabaha mortgage, your lender will buy the property for you and then sell it back to you at a higher price. You’d pay for the home by making monthly instalments over your mortgage term.
You’ll still need a deposit, with the remainder paid over your mortgage term. However, Murabaha mortgages are rarely used for residential home purchases.
Are there any risks with an Islamic mortgage?
There are risks whether you take an Islamic mortgage or a traditional mortgage. However, the main risks involved with Sharia mortgages include the following:
- Halal mortgages can be more expensive than traditional ones due to the additional fees lenders charge.
- You’ll need at least a 15% deposit, as 5%-10% deposits aren’t accepted.
- Due to the complexities involved, solicitors can charge higher fees to carry out the conveyancing for an Islamic mortgage.
- Halal mortgage providers in the UK are limited, so you’ll have fewer options for a mortgage.
How can I apply for an Islamic mortgage?
You can approach a Sharia mortgage provider or ask a mortgage advisor to start your mortgage application.
Mortgage advisors can assess your financial situation to inform you of what’s possible. We can then approach lenders on your behalf to calculate your best option.
Before you apply, prepare for your application by gathering the paperwork you’ll need for a mortgage. You’ll need recent payslips or accounts, bank statements, and a photo ID. Mortgage advisors can also ensure your mortgage is from an authorised Sharia-compliant lender.
Sharia law mortgage FAQs
About the author
Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.