Islamic Mortgage Options Explained

For those of the Islamic faith, mortgage finance can be confusing, particularly if they follow Sharia law. Sharia law forbids interest-bearing loans which makes a conventional mortgage off-limits to Muslims. If you are a follower of Islam and want to buy a property, but can’t afford to buy outright, there are some alternative options available. The options are all halal, so you can continue to follow your faith whilst also achieving your property ownership goals. 

Are mortgages haram?

Yes – Sharia law forbids earning or paying interest so mortgages are haram. One of the principal beliefs in Islam is that banks shouldn’t be able to profit on a person’s need to buy an asset. The belief that no one should make money from the basic need of having somewhere to live is an integral viewpoint held by followers of Islam. If they want to buy a property, they either need to buy outright or with an interest-free loan. Fortunately, there are other Sharia finance options in the form of Home Purchase Plans (HPP’s). These alternatives allow Muslims to achieve their homeownership goals. 

Islamic mortgage options

There are a number of options available based on the principles of Islamic banking. These technically aren’t mortgages and are known as Home Purchase Plans. Home purchase plans help Muslims to buy property through one of the following halal options.

3 main types of Islamic mortgage

There are 3 types of Home Purchase Plans: Ijara, Diminishing Musharaka & Murabaha.

Ijara

With Ijara, the bank purchases the property chosen by the buyer on their behalf. The bank then rents it back to the buyer for a fixed term and monthly cost. At the end of the fixed term, the buyer will then take on full ownership of the property. This type of arrangement is often used for buy to let purchases – where the buyer is not concerned about having full ownership of the property and wants better monthly cash flow.

Diminishing Musharaka

The most popular option in the UK, Diminishing Musharaka allows the buyer to buy the property jointly with the bank. The buyer will need to put down a deposit of between 5% and 20% depending on the provider, and they’ll then make monthly payments to pay off the bank’s share with the rest going on rent. Over time, the bank’s share diminishes to the point where the buyer has full ownership. This type of plan has some similarities to the government’s shared ownership scheme – although it does work very differently.

Murabaha

The Murabaha is a no-interest purchase plan where the provider buys the property and sells it to the buyer for a marked-up price. The buyer will have to put down a deposit of up to 20%, they’ll then repay the provider with fixed payments over the agreed term, but they will own the property upfront from day one. This type of plan is popular for commercial and buy to let purchases as the tenant’s rent covers the monthly payments.

Do UK banks offer Islamic mortgages?

The number of Islamic mortgage providers in the UK is fairly limited. At the time of writing in 2023, none of the traditional high street banks are currently offering these options. There are currently just a few Islamic banks who offer home purchase plans although this may change in the future. In order for a bank to be halal, it must conform to certain ethical and social boundaries and abide by Sharia law. Any funds raised by the bank must not be invested in companies with links to alcohol/tobacco products, gambling, weapons or pornography. The team at Simple Fast Mortgage have some great connections within Islamic banking who offer Sharia-compliant mortgage alternatives, and we also have a lot of experience with Sharia finance, so contact us to discuss your needs.

Conventional mortgage vs Islamic mortgage

The main difference between a conventional mortgage and an Islamic mortgage is the interest element. With a conventional mortgage, a lender lends you the capital and charges interest which you repay on a monthly basis. In comparison, Islamic mortgages are more specialist and do not charge interest because it is not halal to profit from selling an asset. Islamic home purchase plans get around this, either by charging rent and other charges or by buying a property and selling it back to the buyer for a higher cost.

It’s important to remember that an Islamic mortgage will normally cost more than a conventional mortgage.