Unless you are from a Muslim background or faith, you might easily dismiss an Islamic mortgage 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 lender pointed out a paper in Lexology on the 1st 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.
What is a Sharia-compliant mortgage?
An Islamic mortgage is one that’s compliant with Sharia law. These mortgages differ from a conventional mortgage in that they don’t involve paying interest, as that’s forbidden under Sharia law.
They are defined by the ethical – rather than purely religious – concepts outlines 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 banking offer alternatives to interest-led lending, borrowing, and saving – they are “halal” (“clean”) transactions because they are Sharia-compliant mortgages.
Why take out an Islamic mortgage?
The principal appeal, of course, is to Muslims. If you arrange an Islamic 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?
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 29th 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 PrimeLocation.
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 Sharia Mortgage
The thing to remember about a Sharia-compliant or Islamic 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 transaction, but two main vehicles that effectively serve as alternatives to regular mortgages:
- 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;
- 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 between the bank and 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 remortgage by switching to an Ijara or Musharaka home purchase plan.
Does the FCA regulate Islamic mortgages?
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 Islamic mortgage for you may be your next step.