What is an Islamic mortgage, and how does it work? | All About Halal Mortgages UK

In this article, we will guide our readers about Halal Mortgages, also known as Islamic Mortgages. Halal Mortgages are becoming a big part of mortgages in the UK. Every day, we receive various queries regarding Islamic or halal mortgages.

Unless you are from a Muslim background or faith, you might easily dismiss an Islamic loan as being too specialist for you. You probably regard such a mortgage as one reserved for those who profess a particular faith – with the religious connotations somehow tied up in terms of the mortgage.

In fact, Islamic finance products in the UK are treated in the same way as all others – they are subject to the same regulations and legislation as any other mortgage product and mortgage lenders pointed out a paper in Lexology on the 1^st of October 2019.

Indeed, the UK government has positively encouraged the growth of Islamic finance for at least the past 30 years’, according to an official paper entitled UK Excellence in Islamic Finance. In the past ten years or so it has consciously developed a fiscal and regulatory framework to reflect that fact.

Post Topics – Islamic Mortgage UK

What is a Sharia-compliant mortgage?

Why take out an Islamic mortgage?

Who can apply for an Islamic mortgage?

Types of Sharia Mortgage

Can I refinance my home with a Sharia home loan?

Does the FCA regulate Islamic mortgages?

FAQs- Islamic Mortgage

What is a Sharia-compliant mortgage?

A sharia-compliant mortgage is one that’s compliant with Sharia law. Unlike traditional mortgages, Islamic mortgages do not involve paying interest, as this is prohibited under Sharia law.”

They are defined by the ethical – rather than purely religious – concepts outlined in a report by the BBC:

• they must not involve the payment or receipt of interest;
• anyone participating in the transaction must be appropriately informed and not misled or cheated;
• investments in socially unacceptable pursuits – such as gambling, pornography, alcohol, or weapons – are prohibited; and
• both parties to any investment must share all the risks of the transaction.

Mortgages that adhere to such ethical principles are not called mortgages since these would involve interest, which is contrary to Sharia law. Instead, Islamic banks provide products which may go under a variety of names such as a home purchase plan, home finance, or something similar.

Whether you are Muslim or non-Muslim, you may still be interested in – and eligible for – a manner of ethical banking that is compliant with Sharia law. These forms of a banking offer alternatives to interest-led lending, borrowing, and saving – they are “halal” (“clean”) transactions because they are Sharia-compliant mortgages.

What Are the Key Features of a Sharia-Compliant Mortgage and How Do They Differ from Conventional Mortgages?

The key features of a Sharia-compliant mortgage are that it does not involve the payment or receipt of interest, investments in socially unacceptable pursuits are prohibited, and both parties to any investment must share all the risks of the transaction. These mortgages differ from conventional mortgages in several ways.

First, Sharia-compliant mortgages do not involve interest payments, as this is forbidden under Sharia law. Instead, lenders and borrowers agree to a rental agreement, where the borrower pays rent for the use of the property.

Second, Sharia-compliant mortgages are structured in such a way that both parties share all the risks of the transaction. This means that if there is a fall in house prices, both parties will bear some of the losses.

Third, Sharia-compliant mortgages are structured so that they do not involve investments in socially unacceptable pursuits, such as gambling, pornography, alcohol, or weapons.

Finally, Sharia-compliant mortgages are structured so that they are ethical and transparent. This means that both parties must be appropriately informed about the transaction and not be misled or cheated.

Overall, Sharia-compliant mortgages offer an alternative to conventional mortgages for those who wish to adhere to Sharia law. They provide a way for Muslims to purchase property without violating their religious beliefs.

Why take out an Islamic mortgage?

The principal appeal, of course, is to Muslims. If you arrange a Halal Mortgage in the UK, you can be confident that the transaction complies with the laws of your faith – principally, by avoiding anything that uses the money to make money or, in other words, charges an interest rate on money that is lent.

If you are Muslim and do not have the capital to buy a home for you and your family outright, then a Sharia-compliant financial product may help complete the purchase you need.

Who can apply for an Islamic mortgage UK?

As the Sharia law mortgage has become a realistic possibility in the UK, over the last decade or so, they have become a popular choice for Muslims, of course.

An article in Islamic Finance News on the 29^th of January 2020 noted that there are nearly 3.5 million Muslims in the UK, so it comes as no small surprise that the UK is the vanguard of Western countries offering Islamic finance products. In recent years, Sharia-compliant home purchase options have helped more and more Muslims get a foot on the housing ladder in the UK.

But the appeal of such ethical mortgages – where the emphasis is on the partnership between the bank providing the funds and the homeowner receiving them – is attractive not only to Muslims but non-Muslims, too, explains online listings site Prime Location.

This is supported by research reported in Mortgage Strategy magazine recently, which shows that 37% of all British adults believe choosing an ethical financial service provider is as important as issues such as recycling. Plus, 75% of all British adults believe living a more ethical lifestyle is important.

Types of Islamic Mortgage

The thing to remember about a Sharia-compliant or Halal Mortgage is that it is not the same as a regular mortgage or home loan.

Otherwise known as a home purchase plan, it involves you finding the property you want to buy and agreeing on a price with the seller. The bank then buys the house on your behalf and sells it on to you – typically at a higher price. You pay back the bank in instalments and may opt to lease the proportion of the property you do not yet own from the bank. The purpose of this kind of transaction is that interest payments are avoided.

There are various forms of financial transactions, but two main vehicles that effectively serve as alternatives to regular mortgages:

Ijara

• this is the most common type of Sharia-compliant “mortgage” – non-Muslims might recognise it as a lease to own mortgage;
• the bank buys the property, and you pay an agreed rent to lease it back from the bank;
• the transaction requires your commitment to pay the monthly rent until the loan is paid off – and, t that stage only, ownership of the property is transferred from the bank to you;

Musharaka

• also known as a diminishing Musharaka, this is effectively a partnership between the bank and the homebuyer;
• the bank buys the property and resells it to the homebuyer, who makes monthly payments for the purchase;
• the price to the homebuyer reflects the original purchase price and the number of years over which repayments will be made;
• in any future re-sale, any profit will have been agreed upon between the bank and the homeowner from the outset, while any loss is restricted to the amount invested by the homeowner.

Can I refinance my home with a Sharia home loan?

Housing charity Shelter Scotland confirms that you can refinance your home with a Sharia-compliant mortgage.

If you are buying your home with a regular mortgage, you might want to remortgageRefinancing an existing mortgage with a new mortgage. by switching to an Ijara or Musharaka home purchase plan.

How Do Islamic Mortgages Operate in the UK?

An Islamic mortgageA mortgage that complies with Islamic law. works in a similar way to a regular mortgage, but with some key differences. The main difference is that instead of paying interest on the loan, you pay rent to the bank for the portion of the property you do not yet own. This rent is usually paid in monthly instalments until the loan is paid off and ownership of the property is transferred from the bank to you.

Does an Islamic mortgage more expensive than regular mortgages?

No, a Halal Mortgage is not necessarily more expensive than a regular mortgage. In fact, some Halal Loan may be cheaper than regular mortgages due to the lack of interest payments. The cost of an Halal Loan will depend on the type of product you choose and the lender you use. It’s important to compare different products and lenders to find the best deal for your circumstances. It is always better to contact a specialist mortgage broker before starting your mortgage application for a sharia-compliant Islamic mortgage

Does the FCA regulate Islamic mortgages in the UK?

Sharia-compliant home purchase plans are authorised and regulated in exactly the same way as regular mortgages. Provided you checked that the Islamic bank arranging your home purchase plan is duly registered with the Financial Conduct Authority (FCA), you have the reassurance of knowing that if anything goes wrong with the transaction or its aftermath, you may have grounds for a complaint to the Financial Ombudsman Service.

Because Sharia-compliant home purchase plans are typically not found on the high street or at your building society, seeking the advice of your mortgage broker as to the most suitable Halal Loan for you may be your next step.

FAQs- Islamic Mortgage in the UK

What is an Islamic mortgage?

An Islamic home loan is compliant with Sharia Law. Such mortgages are different from traditional property loans as there is no interest to pay as per Sharia Law. This type of mortgage requires at least 20% of the deposit amount. These mortgages are also known as home purchase plans(HPP) which are further differentiated as Ijara(lease), Musharaka(partnership) and Murabaha(profit).

How do I choose suitable Islamic home loans?

You need to consider the following factors when choosing an Islamic home loan:

What is the purpose of the mortgage?

Is it for investment purposes or for personal use? If it’s for investment purposes, then you should go for the Ijara/Murabaha type of mortgage. In case of personal usage, then Musharaka/Ijara would be best suited.

How much money do you want to borrow?

For example, if you want to borrow £100000, then you must get a minimum of £20,000 (20%) down payment.

Do you intend to live on the property for more than 5 years?

If yes, then you should go with Musharaka/Iijara.

What is the purpose behind getting the mortgage?

You may need to buy a house for yourself or for business purposes. In such cases, you should go for Ijaa/Murabahah.

How many children do you have?

If you have one child, then you should go either for Musharaka/Ijaa or Musharaka/Ijahaa.

What is the purpose for which you want to invest the money?

If you want to make some extra money, then you should go to Musharaka/Ijeera.

How long do you plan to stay in the property?

If you plan to stay in it for less than five years, then you should go Ijara/Murabbaah.

Will you be able to afford the repayment?

If not, then you should go musharaka/murabbaah.

Does your current lender offer Muslim home financing?

If so, then you should check whether they offer all types of Muslim home financing or only certain ones.

What steps can I take to ensure that my Islamic mortgage is following Sharia Law?

There are some Halal mortgage lenders available who are regulated by the financial conduct authority(FCA). You can check the names of these lenders on the FCA website. You can also contact an Islamic mortgage broker to learn more about Islamic mortgages in the UK.

Are Islamic mortgages more expensive?

Yes, Islamic mortgages could be more expensive than traditional mortgages because of the Sharia complaints. For Sharia mortgages, you may need to pay extra administration costs, which increases the overall costs. Shariah-compliant bank will ask for at least 20% of the deposit amount. The main reason for this amount is that a Shariah-compliant bank does not charge interest on monthly payments. If you are interested in Islamic mortgage UK, you can contact an expert mortgage broker before starting your mortgage application.

What is the benefit of taking a mortgage from an Islamic bank?

The main benefit of using Islamic finance providers is that it replaces the interest component with “rent”. So, instead of paying interest, you are only making rent payments. This means that you are saving money. Also, Islamic banks usually provide better rates than conventional banks. You can contact an Islamic mortgage broker who can guide you regarding monthly payments.

Is it possible to take out an Islamic mortgage without having any knowledge about Islam?

No, it is impossible to get an Islamic mortgage without understanding the principles of Islam. It is important to understand the concept of Tawheed, which is the belief in the unity of God. Also, it is imperative to understand the concept of Zakat, which is a form of charity given to Muslims. These two concepts are very essential to know when applying for an Islamic mortgage in the UK.

Can I apply for an Islamic mortgage if I am already living in my home?

If you are currently residing in your own home, then you cannot apply for an Islamic mortgage. However, if you are planning to buy another house, then you can apply for a mortgage from an Islamic bank as well.

Is there a difference between an Islamic mortgage and a Halal mortgage?

Islamic mortgages are different from halal mortgages because the latter involves the sale of food items, whereas the former is related to real estate transactions.

What is the difference between traditional mortgage financing and Islamic mortgage financing?

Traditional conventional mortgage financing is based on the principle of usury (riba), while Islamic mortgage provider financing is based on Islamic law (Sharia).

What is an Islamic home financing product?

An Islamic mortgage product is a type of loan that allows Muslim borrowers to borrow money for their housing needs. An Islamic mortgage lender provides financing products such as fixed-rate or variable-rate loans.

Which is the oldest Islamic bank in Britain?

Al Rayan Bank is the oldest and the largest Islamic bank in Britain. They have been providing financial services since 1892.

Can I get an Islamic mortgage in the UK for residential property?

Yes, you can get an Islamic mortgage on British properties. But it depends on the location where you want to live. Most Islamic lenders do not allow people to use their services for commercial purposes. You can contact a financial adviser before starting your application.

Does HSBC offer Islamic mortgages?

HSBC offers Islamic mortgages as one finance product, but they are available only for certain areas.

Are Islamic mortgages cheaper?

Yes, Islamic mortgages are generally cheaper than conventional mortgages

What are the different types of mortgages?

There are three basic types of mortgages: Fixed Rate MortgageA type of mortgage with an interest rate that is fixed for a..., Variable Rate Mortgage and Flexible Rate Mortgage.

Which bank is known as the Islamic Bank of Britain?

According to an article on the Islamic finance Guru website, the Al Rayan Bank was formerly known as the Islamic Bank of Britain. United Bank Limited is also one primary provider of Islamic mortgages in the UK.

What are some of the mainstream banks for Islamic mortgages in the UK?

According to the article on the website , HSBC Bank is the bank to set foot in Islamic Finance Services under its Amanah Finance Brand. However, these services are not continued by HSBC for years. Lloyds bank has also offered Islamic mortgages in the UK, but sadly, this scheme also got continued after 2018. For any latest updates, you can contact a financial adviser.

Can I get a halal mortgage in the UK?

Yes, you may be able to get a halal mortgage. The main thing is that you need to make sure that you are eligible for getting a halal mortgage. If you are not eligible, then you should avoid applying for a halal mortgage.

How much interest will I pay on a halal mortgage?

Interest rates vary depending on the type of mortgage you choose. A fixed-rate mortgage usually charges a lower rate of interest compared to a variable-rate mortgage.