How do Islamic mortgages compare?
29th August 2019
You might not have considered one, but an Islamic mortgage might just be the thing for you whatever your religion - or lack of one.
How do Islamic mortgages work?
The difference is that you buy the home with or from a bank.
This is because under Sharia law, it’s forbidden to take out a traditional mortgage, as making money from a loan isn’t permitted.
While standard mortgages are forbidden, an Islamic mortgage is acceptable because you don’t pay interest.
You take out the mortgage in the usual way, then pay a rental rate - rather than interest - on the amount borrowed. You continue to make these monthly payments until you own the property outright.
For this reason, Islamic mortgages are often referred to as ‘home purchase plans’ or HPPs rather than mortgages.
Why take out an Islamic mortgage if you're not Muslim?
An Islamic mortgage might suit you if you consider yourself particularly ‘ethical’.
Islamic mortgages can be regarded as ethical because you know the full amount you need to pay before buying the home.
That’s in contrast to traditional mortgages where the amount you repay depends on the rate of interest charged, and interest rates can vary.
Also, the finance raised by ‘ethical’ lenders isn’t reinvested in industries contrary to Islamic beliefs, such as alcohol or gambling.
Which lenders offer Islamic mortgages?
None of the mainstream banks or lenders in the UK currently offer Islamic mortgages.
But banks such as Ahli United, ABC International, and Al Rayan do.
Last year, Islamic Bank Gatehouse entered the market targeting a wide range of borrowers. (1)
How do Islamic mortgages compare to standard mortgages?
There are three types of Islamic mortgages: Ijara (lease), Musharaka (partnership) and Murabaha (profit).
Ijara - the lender buys the home from the seller. You then buy it from the lender in monthly instalments which always stay the same.
Musharaka - you buy the home with the lender. You buy the lender’s portion with regular monthly instalments in addition to monthly rental payments. The rental payments become smaller as you gradually own more and more of the house.
Murabaha - the bank buys the home on your behalf. They then sell it to you at a higher price. You pay the higher price in equal instalments over a fixed term. For example, you may be looking to buy a home valued at £150,000, but the bank may sell the property to you for £200,000.
Is an Islamic mortgage right for you?
From an ethical perspective, an Islamic mortgage could give you peace of mind.
If you’re still not sure whether it’s right for you, get some free advice from a mortgage broker. There are lots of options out there and brokers often have deals that aren’t available on the high street.