Shariah law prohibits paying or receiving interest, which means taking out a mortgage is difficult for many Muslims living in the UK. There are, however, a range of mortgages which have been created to enable Muslims to pay back a loan without compromising Islamic principles.
There are three types of Islamic mortgages.
Ijara Mortgages are the most common and are essentially lease-to-own contracts. The would-be buyer finds a home, agrees a price but then the lender pays for the property and becomes the owner. The buyer will enter a lease agreement with the lender and pay rent as a donation towards the purchase of the home. Once the buyer has paid enough rent to cover the purchase price of the home, payments stop and ownership is transferred to them.
Musharaka Mortgages are a type of ijara mortgage and involve the "buyer" becoming a shared owner of their new home. Once they have found their home, agreed a price and allowed the lender to become the owner they enter into a musharaka agreement. This means the buyer makes regular monthly repayments and, by doing this, is buying themselves a share of the property. The more repayments which are made, the more shares they own. Eventually they will own the entire home.
Murabaha Mortgages again involve the potential buyer finding their home, agreeing the price and then allowing the mortgage lender to purchase the property. However, the lender then sells the property to their client at a higher price. The price agreed is based on several factors including how much deposit is given on the day of the sale. Murabaha mortgages require at least 20% of the property's price to be paid up front. A repayment period must also be agreed, a factor which is also taken into account when agreeing the higher price.
Who are Islamic Mortgages for?
With interest being unlawful under Shariah law, the principles by which Muslims live, taking out a mortgage is out of the question for people who closely follow these beliefs. In the past, unless a Muslim living in the UK was wealthy enough to buy a house outright, they would either have to defy Islamic law or simply not purchase a house at all. Islamic mortgages, therefore, make house-buying a possibility even for the most devout followers of Islam.
Pitfalls of Islamic Mortgages
Critics argue these mortgages still require the property-buyer to pay interest, but are designed merely to mask the process, not avoid it. Also, most mortgage lenders - including those who offer Islamic mortgages - fund their lending via the money market themselves. Therefore, many Shariah-compliant mortgages have been financed from a source where interest is charged.
These mortgages might also be provided by lenders who are involved in financing businesses whose interests go against Shariah law. Strict Muslims may not be happy with their lender being involved with firms such as breweries or casinos, for example.
Although the theological problems create a minefield for buyers, most providers of Islamic mortgages consult scholars of Islam to ensure their product is sound.
Where to buy Islamic mortgages
The United Bank of Kuwait and the West Bromwich Building Society have been the main providers in this market for years. The removal of stamp duty on Islamic mortgages in 2003, however, saw several other lenders move in, including HSBC and Lloyds TSB. Mortgage brokers can help buyers to find the best deal by searching the market and many Islamic mortgages are available online, via lenders' websites or comparison sites.