It’s a word you are likely to have seen or heard but what exactly does “halal” mean? The Halal Food Authority offers one of the simplest definitions by explaining that halal means permitted or lawful – and contrasts it with its opposite “haram” which means prohibited or unlawful.
Halal is defined, therefore, with reference to the Muslim Sharia law. Within this context, its meaning broadens into concepts of what is permissible, lawful, clean, and ethical.
It is against that background it becomes clearer to think about Islamic mortgages as ethical mortgages – halal mortgages.
What is a Halal mortgage and how does it work?
What makes a halal mortgage an ethical mortgage? It is ethical because it complies with Sharia law. Sharia law holds that interest-driven money lending and investment are harmful and, so, prohibited.
A Sharia-compliant or halal mortgage, therefore, is one that does not rely on interest-based borrowing but on something more akin to a partnership between the Islamic bank and the aspiring homeowner.
This makes the transaction somewhat different to a conventional mortgage, of course, and the arrangement is more commonly known as a home purchase plan (HPP). Al Rayan Bank, for instance, describes its HPP as a Sharia-compliant alternative to a mortgage that lets you buy – or refinance – your home in an ethical way. It is ethical because it does not involve the payment or receipt of interest.
Instead, home buyers enter into a partnership with the bank whereby the bank purchases the property and the homebuyer pays a monthly payment of rent to the share owned by the bank – with ownership finally transferring to the homebuyer once the bank’s final share in the property has been bought. In that way, this kind of Islamic mortgage becomes similar to a rent or lease to buy mortgage.
In fact, Sharia law mortgages and other types of borrowing may take several different forms – all of which avoid the payment or receipt of interest (“riba”) – three of the main varieties of which are described by the Islamic Finance Guru:
- this is probably the most common of the Sharia-compliant mortgages and widely marketed as a home purchase plan (HPP);
- the bank purchases a home on your behalf and in the meantime, you put down a deposit, which represents your share in its ownership;
- you then pay the bank a monthly rental which also goes towards your eventually buying out the bank’s share of the ownership;
- the rent decreases as the bank’s share diminishes – until the whole of the property becomes yours;
- this rent-only alternative delays your need to repay any of the capital until the very end of the agreement;
- throughout the agreed contract, you pay rent to live in a property owned by the bank but have the option of buying out the whole of the bank’s share at the end of that period;
- alternatively, the property may be sold to repay the bank’s purchase of the home;
Murabaha – also known as tawarruq
- this is the solution typically employed for the purchase of commercial or buy to let property;
- the bank buys the property and sells it immediately to you at a marked up price, which you repay over an agreed number of years;
- some might argue that although this arrangement complies with the letter of Sharia law, it falls short of its spirit.
Who can apply for a Halal mortgage?
As Which? magazine pointed out in an article on the 25th of May 2019, you do not have to be a Muslim to apply for a halal or Sharia-compliant mortgage – they are an increasingly popular choice for Muslims and non-Muslims alike.
Naturally, non-Muslims are not choosing an Islamic mortgage for religious reasons but out of an ethical concern to avoid the interest-driven principles of a conventional mortgage and Sharia law’s prohibition of investments connected in any way with unacceptable pursuits such as alcohol, tobacco, gambling or pornography.
Why take out a Sharia mortgage?
In addition to those seeking an ethical mortgage, of course, there are the millions of UK Muslims who wish to adhere to Islamic laws in their financial dealings. Since the payment of interest is forbidden, this rules out a conventional mortgage, and halal mortgages offer an alternative solution for those who want to buy their own home.
Whether it is the pursuit of a family home or a property in which to invest, Muslims who do not have immediate access to the necessary capital may take up one of an increasing number of Sharia-compliant arrangements to get a foot on the property ladder.
According to past reports by the BBC, the availability of Islamic financial products around the world is growing at an exponential rate approaching 20% per annum.
Are Islamic mortgages regulated by the FCA?
Under the Regulation of Financial Services (Land Transactions) Act 2005, the Financial Conduct Authority (FCA) is responsible for the authorisation and regulation of Islamic banks and finance products that “enable the purchase of a home in a way that is acceptable under Islamic law” – such as Musharaka home purchase plans and Ijara.
If you choose a bank or other financial partner duly registered with the FCA, therefore, you may be confident in the way its activities are regulated and may be assured that if anything goes wrong with the home purchase plan transaction further down the line, you have the right of complaint to the Financial Ombudsman Service.
As a Halal mortgage may be more difficult to find than a mortgage from a conventional bank, you may wish to seek advice from a specialist mortgage broker. They will be able to help you find the most appropriate Sharia law compliant or other home purchase plan for you.