Islamic mortgages allow Muslims to buy a home while still following Sharia law. But what are the differences between an Islamic mortgage and a conventional mortgage?
In this guide:
What is an Islamic mortgage?
An Islamic mortgage offers an alternative to borrowing money for a home while still following Sharia law.
Sharia law does not allow lending or receiving money from someone when interest is being gained.
Earning interest (riba) is not allowed, whether you’re an individual or a bank.
Traditional mortgages involve paying interest, whereas an Islamic mortgage does not.
With an Islamic mortgage you’ll buy the property in partnership with the bank or building society.
Sharia-compliant mortgages are ‘mortgage alternatives’ and are often referred to as ‘home purchase plans’ or HPPs.
Buy to lets
As well as normal residential home purchase plans, some lenders also offer buy-to-let options for Muslim customers.
How do Islamic mortgages work?
Islamic mortgages are based on co-ownership between you and the bank.
They do not involve the same lending/borrowing that traditional mortgages do.
Instead the bank buys the property on your behalf and becomes the legal owner.
You then make monthly payments. But instead of being considered a debt, these payments are like rent.
Part of the rent goes towards buying the house from the bank.
At the end of the term you’ll have paid for the whole property.
An Islamic mortgage will have a “rental rate” shown as a percentage. The rental rate will be influenced by the Bank of England base rate.
It’ll be used to calculate how much rent you need to pay.
The different types of Islamic mortgages
There are 3 main types of Islamic mortgage.
This is when the bank purchases the property you want to buy and then rents it to you for a fixed term at an agreed monthly cost.
Ownership of the property is given to you at the end of the term.
Musharaka or diminishing musharaka (partnership)
This is a co-ownership agreement where you and the bank each own a share of the property.
Part of your monthly payments will go towards buying some of your bank’s share. The other part of your monthly payments will be rent.
Every time you make a payment, you buy more of the bank’s share of the property.
Your rent amount will get smaller as your share grows. Eventually you’ll own the bank’s share of the property as well as your own.
This is when the bank buys the property on your behalf and then sells it to you at a higher price.
You’ll pay the money you owe the bank in equal payments over an agreed term.
For example, the house you buy may be valued at £250,000, but the bank may sell the property to you for £300,000.
What is Finance to Value?
Finance to Value, or FTV, is a ratio to show how much finance the bank will help with in comparison to the value of the property.
The FTV is very similar to the loan to value (LTV) ratio on a traditional mortgage.
Each Islamic mortgage will come with a maximum FTV shown as a percentage.
You can use the FTV to calculate the deposit. This is sometimes called the ‘first payment’.
You’ll normally need a deposit of at least 20% of the property’s value.
For example, if a home purchase plan has a maximum FTV of 80%, you’ll need a 20% deposit.
In general the lower the FTV, the less your home purchase plan will cost you.
Are Islamic mortgages haram?
No, Islamic mortgages are not regarded as haram.
Haram means forbidden by Islamic law.
Halal means lawful or allowed in Islamic law.
A traditional mortgage is haram, but Islamic home purchase plans are halal.
Islamic mortgage calculators
If you want to take out an Islamic mortgage, you can use an Islamic mortgage calculator to give you an idea of what your monthly payments could be.
Al Rayan Bank is an Islamic bank with branches in the UK. They have an Islamic mortgage calculator on their website.¹
To get an estimate you’ll need to enter the:
The cost of Islamic mortgages
Islamic mortgages tend to be more expensive than regular mortgages.
This is because Islamic mortgages involve more paperwork and legal work.
There’s also not much competition, with only a handful of Islamic banks offering Sharia compliant mortgages in the UK.
Can you take out an Islamic mortgage if you're not Muslim?
Non-Muslims can choose to take out an Islamic mortgage.
An Islamic mortgage might suit you if you prefer a more ethical alternative to borrowing and paying interest.
Islamic home purchase plans can be seen as ethical because you know the full amount you need to pay before buying the home.
This differs from traditional mortgages where the amount you repay depends on the interest charged, and interest rates can vary.
The finance raised by ‘ethical’ lenders isn’t reinvested in industries not supported by Islamic beliefs, such as alcohol or gambling.
Should I get an Islamic mortgage?
If you’re a Muslim and want to follow Sharia law, an Islamic mortgage offers a way to buy a home while doing so.
An Islamic mortgage could give you peace of mind from an ethical perspective even if you are not Muslim.
Keep in mind that an Islamic mortgage is likely to be more expensive than a regular mortgage. You'll need to think about whether you can afford the extra cost.
Islamic mortgage lenders
Islamic banks which offer home purchase plans to UK customers include:
Al Rayan Bank
Ahli United Bank
ABC International Bank
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¹ Al Rayan home purchase plan calculator