What is an Islamic mortgage and how do they work?

In Islam, loans which charge interest are forbidden. Due to this, it is common for many Muslims to search for halal alternatives to standard mortgages when buying a property.

What is an Islamic Mortgage?

These mortgages, which comply with sharia rules, are alternatives to most mortgages, while there are many options on the market, most function in similar ways. First, the bank buys the property and becomes the owner by law. Then, you make monthly payments that act in a similar way to rent. Part of these payments goes to buying the property owner’s share of the house. 

Once you reach the end of the term, you will have either bought the property or have an outstanding amount that will need to be paid before the legal ownership of the property is transferred to you.

This is the standard way in which Islamic mortgages work, but this can vary depending on the type you select.

The Different Types of Islamic Mortgage

Typically, there are three different types of Islamic halal mortgages. They tend to function all in the same general way, but have some distinct differences, giving a wider choice to potential customers.

Ijara

The Ijara plan is a payment plan which is designed to ensure your ownership share stays consistent throughout the entire length of your payment plan term. This happens by making monthly payments that go to pay both your rent and also to help finance the final purchase of the property.

Murabaha

This is another type of interest-free plan. When you select a Murabaha mortgage plan, the provider buys the property outright and then sells it to you at a higher price. This is then paid for by you in monthly instalments. This is less common in the UK.

Diminishing Musharaka

With this payment plan, the goal is to increase your ownership share as the bank’s decreases steadily. This is done by setting up a joint purchase agreement with your Islamic bank.

Is there a risk in choosing an Islamic mortgage?

There is sometimes a misconception that selecting a halal mortgage is in some way riskier than opting for a more standard UK mortgage. This is not true.

Islamic banks – just like non-Islamic banks – are regulated by the FCA (Financial Conduct Authority), and the Prudential Regulatory Authority. This means that by law, they must meet the standards set out by these agencies.

It can be argued that Islamic banks are safer than other banks. Due to the restrictions placed upon them by the sharia rules, they cannot partake in risky activities such as high-risk trading. This means that customers’ money is often much safer.

It is for this reason that many customers of Islamic banks in the UK are non-Muslims, looking for safe banking.

Banks that do offer Islamic mortgages in 2020

Gatehouse

Established in 2007, this bank has not been offering house payment plans for very long. Despite this, it has grown quickly in the market. To increase its customer base, it has some major offers that are hard to find elsewhere.

Al Rayan Bank (was the Islamic Bank of Britain)

This is the biggest and oldest Islamic bank in the UK. Because of this, they have a long history of supplying Islamic mortgages to a considerable amount of customers. They dominate the market, and can reliably help most people looking for a halal product.

Al Ahli

This bank is the UK arm of NCB – one of the largest banks in the Middle East. They have been offering Islamic mortgage products for many years now, and their typical clients tend to be buying expensive properties, mostly around London. While they might not be suitable for most, they do offer some great deals and rates.

Banks that do not offer Islamic mortgages in 2020

Lloyds

While this mainstream UK bank did once offer halal mortgages, they discontinued this service in 2018, along with other Islamic products.

HSBC

As the UK’s largest bank, HSBC has, at some point, tried everything. This includes Islamic mortgages. These were provided under the Amanah Finance name. However, this has since been discontinued, and HSBC now no longer offer halal mortgages.

Al Buraq Finance

The Arab Banking Corporation did once provide Islamic mortgages. They did this while collaborating with Bristol & West. However, this has since ended, and the bank no longer provides such products.

Islamic Mortgages – A Useful Product for the Right Customer

As we have seen, Islamic mortgages can offer a great deal to customers looking to purchase a property. They can be used as interest-free loans to help pay for homes. For this reason, they appeal not only to Muslims but to other types of customers as well. Demand is steadily increasing, so expect to see the list of available halal products in the marketplace continue to grow.

Nevertheless, as with any product, you must do the proper research. These products are not a one-size-fits-all solution! Thinking about buying a property? Our conveyancing solicitors are available now to offer advice, recommendations, and information!