Under the religious laws of Islam, it is forbidden to pay or receive interest on a loan.  For many years this proved to be an obstacle for muslims  living in Britain as they were unable to apply for a mortgage to buy a property, as the mortgages traditionally available in the UK were based on a form of financing that involved the charging and paying of interest.  This meant that only those very wealthy British muslims  could purchase properties as they were able to purchase outright without the need for a mortgage.

In recent times , many banks and buildings societies have introduced mortgages and other financial products  which enable British Muslims to obtain mortgages  and loans without breaching their Islamic teachings. 

In this article, we look at the most prominent form of Islamic finance offered by the banks and building societies in the UK, this being Islamic or ‘Halal’ Mortgages.

Halal mortgages are available in two forms, these being Ijara and Murabaha.

The Ijara Mortgage

 An Ijara Mortgage, it is the lender who purchases the property and has ownership of the property.  The Lender will then grant the person requiring the Ijara Mortgage a long term lease of the property under which they pay rent  to the lender aswell as a contribution towards the purchase of the property.

The Ijara Mortgage is the more popular choice of mortgage as the person requiring the mortgage does not need to have a large amount of capital to set up the mortgage.  Ijara Mortgages are also more flexible than the alternative Murabaha mortgage.  Another benefit of the Ijara Mortgage is that it can even be taken out to replace an existing interest mortgage.  Further the amount that  the borrower has to pay is usually fixed annually and  the outstanding balance can be paid off at any time without incurring a penalty.

The Murabaha Mortgage

Under a Murabaha Mortgage the borrower has to pay 20% of the value of the property on the day of purchase.  The Property is registered in the name of the borrower.  The borrower finds the house they want to buy.  The bank then buys the house directly and then re-sells it to the borrower at a higher price.  The higher price is calculated with using price the bank has paid for the house and the agreed repayment period, minus the percentage already paid (minimum 20%).

Due to the fact that the borrower needs to find a minimum of 20% of the value of the house, the Murabaha Mortgage is only an option for those individuals or families that have sufficient capital behind them.

Do You Have to Be A Muslim to Get an Islamic Mortgage?

You do not have to be a muslim to take out an Islamic Mortgage.  Some of the main lenders such as HSBC offer Islamic mortgages.   Islamic Mortgages offer certainty as the mortgage payments are fixed either annually (in the form of the Ijara Mortgage) or for the term of the mortgage (as in the Murabaha Mortgage).

The administrative and application fees are often higher and the process of obtaining an Islamic mortgage can be longer.

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