Last reviewed on 26th March 2022
As a Muslim, you may require an Islamic mortgage that complies with Sharia Law. But, how do Sharia mortgages work and what should you do before applying?
As with any mortgage, a tactful approach is always best advised. You certainly don’t want to apply with lenders at random as you’ll need to ensure your lender offers Sharia-compliant mortgages. Furthermore, finding the best deal possible can reduce your mortgage costs.
What is an Islamic mortgage?
An Islamic mortgage refers to a mortgage that complies with Sharia law. As a result, they’re very much different to traditional UK mortgages. The main difference is that an Islamic mortgage doesn’t involve the repayment of interest. This is because charging interest is against Sharia law.
Islamic mortgages can also be referred to as halal mortgages or Sharia mortgages. It’s also important to note that some Islamic scholars disagree on what constitutes a Sharia mortgage.
What types of Islamic mortgages are available?
There are currently three types of Islamic mortgages available:
- Ijara (lease)
- Musharaka (partnership)
- Murabaha (profit)
With an Ijara mortgage, your lender will buy the property for you and then lease it to you for a fixed length of time. You’ll agree to a fixed monthly cost and once the fixed term expires, you’ll own the property outright.
Musharaka mortgages can be best explained as a partnership between you and your lender. This is because you’ll both own a separate share of the property. Each repayment you make will go towards repaying the outstanding capital and towards rent.
This mortgage type is very similar to a shared ownership mortgage. That being said, you’ll eventually own more shares of the property with each payment you make, until you buy your lender out.
This mortgage type is where your lender will buy the property for you and then sell it back to you at a higher price. The total value including the additional amount is repaid in instalments over your mortgage term.
You’ll still need a deposit to place down, with the remainder being paid over your mortgage term. There’s no element of rent here, as the property will be yours from the very start.
Will my mortgage comply with Sharia law?
If your lender offers Islamic mortgages, it will be clear in the options available to you. For instance, you should have at least one of the three types available, such as an Ijara, Musharaka or a Murabaha mortgage.
Your lender should also be certified under Sharia compliance, typically from an authority in Sharia law. It’s important to know that lenders that offer Islamic mortgages should also be regulated by the Financial Conduct Authority (FCA). As a result, you’ll have the same protection as other FCA regulated mortgages.
Are Islamic mortgages expensive?
Compared to regular mortgages, Islamic mortgage products can be more expensive. The main reason is that Sharia-compliant lenders tend to have higher costs as they’re often buying the property outright. As a result, the risk of lending also becomes higher.
If you require an Islamic mortgage, you’ll also need a higher deposit in comparison to a regular mortgage. For instance, it’s possible to get a regular mortgage with a 5% deposit, but with an Islamic mortgage, it’s likely you’ll require a 15% deposit at least. This is in addition to higher fees that your lender may also charge.
On a positive note, because you have a higher deposit, the amount you repay each month should be lower. This is because you’re borrowing less and you’re not paying interest on the loan.
What fees are involved?
In addition to repaying your lender, you’ll also need to pay fees for your mortgage.
Fees can include:
- Mortgage lender fees
- Legal fees (conveyancing)
- Survey fees
- Stamp duty (where applicable)
- Buildings insurance
- Mortgage broker fees
What are the pros and cons of Islamic mortgages?
With any mortgage type, there will be pros and cons. It’s important to understand the potential positives and negatives before making a commitment.
- Halal way of getting a mortgage for those who want to remain compliant with Sharia law
- Avoid paying interest on your mortgage
- Possibility of redeeming your mortgage early and selling your property at any time without paying an early redemption charge (ERC), subject to your mortgage terms
- If you pay rent in addition to your mortgage, it can be cheaper than if you were to rent a property instead of buying
- It’s likely your property will be leasehold rather than freehold, which can incur additional costs and less control
- The mortgage amount will remain the same, even if house prices decrease, but this is the same with conventional mortgages too
- Can be more expensive than traditional mortgages due to the additional fees that lenders often charge
- It’s likely you’ll need a higher deposit, as 5% deposits aren’t accepted
- Solicitors can charge higher fees to carry out the conveyancing for an Islamic mortgage, simply due to the complexities involved
- The number of lenders offering Islamic mortgages are limited in comparison to regular mortgages which means you’ll have less choice
Buy to let Islamic mortgages
Buy to let can be a profitable investment and the good news is that lenders offer sharia-compliant buy to let mortgages. That being said, the number of lenders is limited.
Most lenders require a 25% deposit minimum and will have similar options to residential Islamic mortgages. You’ll need to ensure your rental income is high enough to repay your mortgage and be a profitable investment.
How can I apply for a Sharia mortgage?
You can approach a Sharia mortgage lender yourself, or you can speak to a mortgage advisor for further help. Mortgage advisors can assess your financial situation to inform you of what’s possible. We can then approach lenders on your behalf to calculate the best possible deal.
It’s recommended to gather the paperwork you’ll need for a mortgage also. For instance, you’ll need recent payslips or accounts if you’re self-employed, in addition to bank statements and photo ID. Mortgage advisors can also ensure that your mortgage is from an authorised Sharia-compliant lender.