When is comes to loans, interest is forbidden in Islam. As a result, seeking a halal alternative when purchasing property is a route many Muslims take instead.
So what is an Islamic Mortgage?
An Islamic Mortgage, or Sharia-compliant mortgage, is simply an alternate mortgage option which does not include interest purchase plans. There are many ways for this to work but there is a common method. This method starts off with the bank buying the property on your behalf and becoming the legal owner. With each monthly instalment, you slowly buy the property from them and become the legal owner.
There are three types of Sharia mortgage alternatives; Ijara, Diminishing Musharaka and Murabaha.
In an Ijara mortgage plan, the monthly payment is part rent and part capital to finance your final purchase. What this means is your ownership share of the property stays consistent throughout the payment plan period.
This is a joint purchase plan between the Islamic bank and you. In this, you pay off the provider’s share in monthly instalments from which their ownership share decreases while yours increases.
The third type of interest plan is one that is uncommon in the UK when purchasing homes but is sometimes seen in commercial property development. In the Murabaha plan, the bank buys the property outright and then sells it to you by monthly instalments at a marked-up price.
When deciding which Islamic mortgage alternative to choose, it is vital you consider the advantages and disadvantages of all three before coming to an agreement.
What are the risks of a Sharia-compliant mortgages?
During such payment plans, you still need to cover the cost of insurance, general maintenance, conveyancing and stamp duty on the initial purchase. You will have to add these all up and put them in the cost of the purchase plan itself.
In addition, many providers use LIBOR-pegged values to set your rent rather than average levels in your local area as a guide. A LIBOR, London Interbank Offer Rate, is a “global reference rate for unsecured short-term borrowing in the interbank market. It acts as a benchmark for short-term interest rates. It is used for pricing of interest rate swaps, currency rate swaps as well as mortgages.” This could be an advantage but could also result in you paying out more than others in the area.
How much deposit is needed for an Islamic mortgage?
Typically, a 20% deposit will qualify you for an Islamic mortgage. You will also need to budget for building insurance, stamp duty, surveys and any alternate costs such as mortgage broker fees.
Where can I find an Islamic mortgage?
Sharia mortgage alternatives can be found at many locations such as building societies and UK banks. Not all of them specify halal mortgages but can still provide them if asked. There are plenty of individual no-interest plans available so it’s important you search around well for the best deal for you.
Mortgage brokers can also be highly beneficial in helping you choose between the many options available and they can also assist you when it comes to re-mortgaging.
Home purchase plans, including Islamic ones, are regulated by the Financial Conduct Authority, which means that all providers and banks are legally required to protect your interests.
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