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Islamic mortgages

Last updated on 18th November 2023 by Martin Alexander

Religious values can affect the type of mortgage you’ll need. For instance, Islam forbids paying and receiving interest, so Muslims who want to comply with Sharia law can get an Islamic mortgage, offering a halal way of buying a home.

What is an Islamic mortgage?

An Islamic mortgage is a mortgage that complies with Sharia law and doesn’t involve the repayment of interest. They 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:

Ijara mortgages

With an Ijara mortgage, your lender will buy the property and lease 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

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.

Murabaha mortgages

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.

FAQs

If your lender offers Islamic mortgages, you should have at least one of three options: an Ijara, Musharaka or Murabaha mortgage.

Your lender should also be certified by an authority in Sharia law. The Financial Conduct Authority (FCA) also regulates Islamic mortgage lenders. So, you’ll have the same protection as other FCA-regulated mortgages.

In addition to your mortgage deposit, you’ll need to pay fees, such as lender, legal, and survey fees. You may also be liable for stamp duty land tax.

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 buy the property outright. The risk of lending also becomes higher.

In addition to repaying your mortgage, you’ll also have to pay rent. However, you won’t pay interest to remain compliant with Sharia law.

You’ll require at least a 15% deposit for an Islamic mortgage. However, saving a 20% deposit will unlock more lenders.

As you have a higher deposit, the amount you repay each month should be lower, as you’re borrowing less.

Muslims and non-Muslims can apply for an Islamic mortgage. A non-Muslim may want to use an Islamic mortgage due to the choice of not paying interest.

Yes, you’ll undergo a credit check for an Islamic mortgage. Lenders need to check whether you can afford to pay a mortgage and whether you’ve ever had financial difficulty.

You can get a Sharia-compliant buy-to-let mortgage. However, the number of lenders is limited.

Most lenders require a 25% deposit minimum and will have similar options to residential Islamic mortgages. You must ensure your rental income is high enough to repay your mortgage to qualify.

About the author

Martin Alexander
Senior Mortgage Advisor

Martin is a senior mortgage advisor who has held a CeMAP qualification for over 15 years while completing an MBA in Global Banking and Finance.