Mortgages, by their very nature, are interest-bearing products. This means that according to the Islamic faith they are considered haram, an Arabic term meaning forbidden. As a result, many people believe that any kind of mortgage should be considered haram according to Muslim teaching. However, Islamic mortgage products have been developed in consultation with Muslim scholars to address the issue, enabling faithful Muslims to purchase property. Despite this, many Muslims still wonder if an Islamic mortgage is halal or haram, and how they differ from traditional interest-bearing mortgages.
Here's everything you need to know.
Why is interest haram?
Interest or Riba is strictly forbidden within Islam. Interest is the amount above the loan received by the individual or company that lends money. At its core, the principle refers to the unequal exchange of fees resulting from borrowing money, particularly if that exchange is exploitative.
While any mortgage should not be exploitative, the practice of interest being added to a loan does mean that a traditional mortgage will usually be considered haram. As well as mortgages, this principle might also be applied to a loan used to purchase goods and services, insurance policies and loans to cover student fees. A range of Islamic finance products have been developed to meet the needs of faithful Muslims in the modern world.
Is an Islamic mortgage halal or haram?
Islamic mortgages are considered halal and have been carefully developed in line with Islamic teaching to ensure that they are not inadvertently haram. This means that when you use an Islamic mortgage to facilitate a property purchase you will be acting within the teachings of the Islamic faith.
Here we'll take a look at why Islamic mortgages are considered halal in more detail.
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What is an Islamic Mortgage?
Islamic Mortgages are mortgages that are structured in such a way to be fully compliant with Sharia Law. Unlike traditional mortgages, they don't incur interest. Islamic or sharia mortgages are sometimes referred to as Home Purchase Plan (HPP), and there are three different types. Each of these types is structured slightly differently. To qualify for an Islamic Mortgage, you will generally need a larger deposit than is the case with traditional mortgages, with 20% being typical.
What are the three types of Islamic Mortgage?
The three types of Islamic mortgage are:
Ijara
An Ijara product involves the bank purchasing the property that you are interested in, and then leasing it to you at a monthly cost. When the agreed term of the lease comes to an end, property ownership is then transferred to you, making you the outright owner of the property.
Musharaka
This is an agreement where both you and the bank own a share of the property. You will make a monthly repayment made up of both rent and capital, and each payment you make will purchase more of the bank's share. As your share grows, the rent part of your monthly payment decreases, and eventually you'll have purchased the bank's share of the property in its entirety.
Murabaha
This type of Islamic mortgage involves the bank purchasing the property on your behalf. It then sells the property to you for a higher price over a fixed term. These payments will be of equal instalments and are not subject to interest.
How do you know that an Islamic mortgage is Sharia?
Any lender that offers Islamic mortgages should be able to show that their products have been developed in line with Sharia compliance guidance. This will usually have been provided by someone with authority in Islamic law. A growing number of providers now offer Islamic mortgages, and these will be regulated by the Financial Conduct Authority (FCA). Anyone who takes out an Islamic mortgage should receive the same level of protection as they would if they'd taken out any other kind of mortgage product.
Are Islamic mortgages more expensive?
Because Sharia-compliant lenders will have to cover higher administration costs Islamic mortgage products can be more expensive than other products. They also require a larger deposit than is usually needed for a non-Sharia mortgage. For instance, some mortgage products can be secured for just a 5% deposit, whereas a Sharia mortgage will usually require a deposit of close to 20%, although this often varies between products and providers. A mortgage advisor will usually offer free advice about the range of products available, as well as their likely cost.
An Islamic mortgage calculator can indicate what your monthly payments might be on different Sharia-compliant products. To get an accurate figure you will usually be required to provide the finance amount, the type of product you would like and the period over which you require the product.
Are there any risks in taking out an Islamic mortgage?
When you use an Islamic mortgage product to facilitate a purchase, the bank will be the legal owner of the property. Despite this, you will have the responsibilities of a homeowner when it comes to insurance, conveyancing, stamp duty and ongoing maintenance. These costs will need to be factored into the purchase price when you're making your calculations and can impact affordability.
It's also important to remember that many providers of Islamic mortgages will set your rent for the property to LIBOR-pegged values. This means that you could find yourself paying more in rental value than the local market could reasonably justify. Our affordability calculator can give you an indication of what might be a realistic repayment amount for your budget.
Affordability Calculator
Flexible, ethical products
Islamic mortgages are flexible, ethical products suitable for anyone who wants to stay within Sharia law and other borrowers who may find them more attractive than traditional products.
Comprehensive mortgage advice
WIS Mortgages can provide comprehensive mortgage advice across a range of products. As mortgage brokers based in London, Kent and Buckinghamshire we cover the whole of the UK. We also offer specialist advice for contractors.
For more information about Islamic mortgages, get in touch today.
As a mortgage is secured against your home/property it may be repossessed if you do not keep up with the mortgage repayments.
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