There are many considerations and aspects which make getting a house fundamentally difficult. For instance, people tend to discuss the struggle of saving for a substantial mortgage deposit, a prospect which demands time, money, and patience. Likewise, you may feel like there just isn’t enough variety on the market for you, and that you consequently can’t quite locate that dream home or find a suitable mortgage product.
While these common barriers are all valid, there is also the often overlooked element of a mortgage loan aligning with one’s ethical and religious values. Taking into account the fact that there are almost four million muslims currently residing in the UK, you may be surprised to know that traditional mortgages do not exactly correspond to the Islamic belief system. However, there are ‘mortgages’ designed for this very purpose, i.e., to be halal (lawful). These mortgage types are called Islamic mortgages and allow muslims to purchase a property in a way which doesn’t impede on their religion in a practical sense.
But, as is the case with every slightly unconventional mortgage product, there are inherent complications with getting an islamic mortgage which can make the entire process even more complex and frustrating than it usually can be. Where instead, getting a house should be an enjoyable and satisfying experience. Not to mention, it’s significantly harder to find a lender who offers islamic mortgages. For this reason, we firmly suggest that you hire the services of an expert mortgage broker to thoroughly assess your case in order to match you with an appropriate mortgage provider, one who will account for your personal situation and specific requirements. We at The Mortgage Genie have assisted plenty of our UK clients by getting them an islamic mortgage, as well as by supporting them with the intrinsic paperwork demanded. If you’re interested in joining those among our success stories, then be sure to get in touch at 01915809890 today.
Yet, despite what we can do for you, it’s still recommended that you come to terms with everything there is to know about islamic mortgages before making a concrete decision. So that you can fully inform yourself on the matter, we’ve put together this piece which goes over all the important details. We’ll cover:
What is an Islamic Mortgage?
Islamic mortgages are defined as those which are compliant with Sharia law. These mortgages differ from standard residential mortgages in that the loan doesn’t involve paying interest, given that this is considered haram (unlawful) under Sharia law. Namely, making money from money is against the financial beliefs of Islam.
In essence, such packages represent an alternative to a mortgage, and so aren’t really mortgages at all, in spite of the label being convenient. Rather, Islamic mortgages function as no-interest home purchase plans (HPPs), a form of sale and lease agreement. Albeit, the end result is basically the same as a typical mortgage and provides prospective homeowners with the finance needed to purchase a property.
How do Islamic mortgages work?
There are several variations of islamic mortgages, but they all follow the same principle underpinning HPPs. That is, your chosen bank buys the home you want on your behalf and therefore becomes the legal owner initially. Afterwards, you will then begin to make monthly payments akin to rent, a portion of this going towards purchasing the property off the bank.
At the end of the mortgage’s term, you’ll have repaid your loan in full and own the home outright, or instead there’ll be a leftover amount you’ll have to settle before becoming the legal owner. Essentially, Islamic mortgages work by having the bank replace interest with rent so the arrangement is Sharia-compliant.
Types of Islamic mortgages
In the UK, there are three main types of Islamic mortgages. They are as follows:
Ijara HPPs are where the bank buys the house you want to purchase and leases it to you for a fixed period at a monthly cost. These monthly payments are part rent and part capital to finance your eventual ownership. They imply that your share of the home remains consistent throughout the length of the term.
Musharaka, or diminishing Musharaka, is a co-ownership agreement between you and your islamic bank. It is where both you and your bank own a separate share of the property, with you paying off the bank’s share in monthly instalments (again, part rent, part capital) so as to increase your own portion. Followingly, your rent cost decreases as your share grows, ultimately having you own the whole property.
Under the Murabaha purchase plan, your bank buys the property before selling it to you at a marked-up price. Subsequently, the higher price is paid by you via monthly instalments over a fixed term. To give an example, the bank may purchase a property valued at £100,000, and then sell it to you for £125,000. In the UK, these kinds of islamic mortgages are rarely used for residential homes, instead being used for commercial property purchases.
How do I know my Islamic mortgage is Sharia-compliant?
You can be sure that your Islamic mortgage is Sharia-compliant because lenders which offer such mortgages receive guidance from an authority on Islamic law. This authority might consist of a panel of scholars who have the ability to afford you with corresponding proof of their approval.
Moreover, Islamic mortgages are available from several providers, all of which are regulated by the Financial Conduct Authority (FCA), so you know that you’re getting the same protection as borrowers who pay interest.
Are Islamic mortgages more expensive?
Whether an Islamic mortgage is more expensive than the interest-charging alternatives depends on the lender you’ve selected and what their terms are. Although, in general, Islamic mortgages can total out to be more costly due to the higher level of administration required, that which you yourself must finance. Additionally, there’s a smaller pool of lenders who offer these mortgages, making it so that market competition can’t inadvertently reduce costs. And so, with this in mind, getting an Islamic mortgage might mean you have to budget a little more shrewdly.
Beyond this, any extra fees and charges incurred are in-line with what homeowners with a traditional mortgage would expect to pay. This includes fees for a survey and conveyancing, valuation, stamp duty (if applicable), buildings and contents insurance, as well as legal costs.
How much deposit do you need for an Islamic mortgage?
Owing to there being a smaller array of lenders who offer Islamic mortgages, it’s probable that you’ll need to put down a larger mortgage deposit. That is, where it’s possible to get a non-Sharia mortgage with a deposit as little as 5%, your chances of obtaining a halal one are markedly slimmer.
Not to mention, even if you do locate a lender asking for a 5% deposit, this will come with significantly higher monthly repayments. It’s integral that you save as much money as feasibly possible as you’ll be entitled to more competitive deals. Accordingly, it’s best practice to have between 10-35% of a property’s total value saved up for an Islamic mortgage.
Do Islamic mortgage lenders carry out credit checks?
Hard credit checks are a core part of every mortgage provider’s eligibility assessment, and Islamic mortgages are no exception to the rule, given that anyone can apply for them, regardless of their religion. Lenders carry out credit checks to see your credit history. In particular, the quality of your credit score, and if you’ve ever had bad credit, a court county judgement (CCJ), an IVA, and if you’ve ever failed to meet payday loans or claimed for bankruptcy in the past.
If you’re a mortgage candidate and have any of the above present on your file, then it will harm the likelihood of you securing a mortgage and may cause a lender to reject your application. After all, a lender needs to be certain that you are financially capable of keeping up with your monthly repayments. Having said this, a large deposit can work to offset such instances, especially if they occurred over six years ago. Furthermore, having a specialist mortgage broker at hand to navigate your case will equally work in your favour.
It’s important to note that hard credit checks leave a mark on your report. As such, if you want to get an idea of your current suitability before you apply for a mortgage, you can use our free credit check tool (£14.99 per month after the free 30-day trial). Using it will help you to discern any possible mistakes or fraudulent activity on your profile, so that you can deal with such problems as soon as possible. The trial and subscription can be cancelled at any time.
The risks of Islamic mortgages
As per any loan, there is a degree of risk involved with Islamic mortgages, even though they stand as ethically-sound alternatives to standard mortgages. Indeed, despite Islamic mortgages not implying any actual borrowing, there are consequences if you fail to satisfactorily meet your monthly repayments.
Specifically, if you miss a payment then you’ll be fined, and if you miss a multitude then there’s the standout potential of your home being repossessed. It might seem like you and the lender are taking equal risk, but lenders have the luxury of covering themselves adequately if things go awry. In essence, since they’re purchasing a property on your behalf, they’re allowing you to stay in it conditionally. This is why it’s so vital for you to assimilate an Islamic mortgage lender’s terms before coming to a contractual agreement.
What banks offer Islamic mortgages in the UK?
Though there are three types of Islamic mortgages, these represent a wide range of surface area on the market. You can find Sharia-compliant mortgages at many UK banks and building societies, including from those who do not exclusively label themselves as Islamic. What’s more, Sharia banking is experiencing a growth in popularity in the UK, with Islamic buy-to-let mortgages being out there, so you’re certain to find a Islamic mortgage product that’s suited to your personal situation and individual circumstances.
The crux is that Islamic mortgages are still quite a niche subject, meaning if you want to thoroughly browse all the options on the table then you’ll need to get in touch with a specialist halal mortgage broker with extensive experience who can evaluate your case, rightly advise you, and match you with a willing lender.
We at The Mortgage Genie have comprehensive knowledge on how to get a mortgage and are committed to assisting people in securing loans of all types, including Sharia-compliant mortgages. We hope that this piece has answered all of your natural questions and cleared up any ambiguity surrounding Islamic mortgages.
Each day we help an increasing number of people to achieve housing happiness by finding a mortgage solution that’s suited to them, one that is tailored to their personal situation and individual circumstances, all while guiding them through the entire procedure. If you require a team of expert mortgage brokers, then be sure to contact us at 01915809890 and we’ll set you on the path towards owning your dream property! And why not see how much you could borrow up to today by using our mortgage calculator?