Islamic Mortgages and Why They’re Not Just for
Muslims
Islamic Mortgages and not just for Muslims which may come as a
suprise for some. However, an Islamic mortgage does have its
differences.
What is an Islamic Mortgage?
According to Islam, making money from money is “usury” and is not
permitted. This includes receiving or paying interest (it is wrong to
assist another in making money from money). 
This creates an obvious
problem for a muslim who wishes to own his own property. Buying outright
with cash will not be an option open to the vast majority and a
traditional interest based mortgage loan cannot be obtained with
compromising his religious beliefs. Islamic mortgages (also called
Shariah or Halal mortgages) were introduced to combat this problem and
provide a method of obtaining finance from a lending institution without
paying interest. Whilst the the main purpose of this method of
borrowing is to allow muslims to maintain their beliefs while leading
normal lives when living in non-Islamic countries, it has other
advantages which have nothing to do with religion.
How Do Banks Make a Profit?
Naturally banks still want to make a profit on the money they lend
and they do this by either buying the property from the seller at the
normal agreed price and selling it on the borrower for a higher price or
by buying the property and renting it to the borrower during the
continuance of the term.
How Do Islamic Mortgages Work?
There are two main types of Islamic Mortgage, Murabaha and Ijara:
Murabaha
With this arrangement the purchaser finds a property and agrees a
purchase price with the seller in the usual way.The bank then purchases
the property on behalf of the buyer and immediately sells it to the
buyer at a higher price. A percentage of the purchase price (the
deposit) is paid to the bank immediately and the remainder is paid in
monthly instalments over the term. The instalments are fixed over the
life of the term. The maximum amount of the purchase price the bank will
agree to defer will be 80%, in other words a minimum 20% deposit will
be required to obtain this type of mortgage so it is only suitable for
those buyer who have substantial capital to invest.
Ijara
Again, you will find a property and agree a purchase price and the
bank will buy the property, however with this arrangement the property
will be registered to the bank who will grant a lease to you and give
you a “promise to sell”.
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The term of the lease will be equal to the term of the mortgage. You
will make monthly payments which compromise a rent for the use of the
bank’s share of the property and a payment to acquire part of the bank’s
share. The rent payments will usually be reviewed each year, just as
rent on an assured shorthold tenancy might be. At the end of the term
you will have acquired all of the bank’s share and the bank will be
required to make good on its promise to sell by transferring the
freehold title to you. The lease term will have come to an end and it
will be extinguished. The advantage of this arrangement over Murabaha is
that a smaller deposit will be acceptable, perhaps 10%.
What if I Have an Islamic Mortgage and Want to Sell Before the End
of the Term?
There is no reason that you cannot sell before the end of the term
and repay the borrowing in full, and this can usually be done without
penalty. The bank’s promise to sell is simply enforced earlier. You
would only pay the bank the amount originally borrowed less any payments
already made, so that the bank does not get a share of any increase in
value.
Which Banks Provide Islamic Mortgages?
There are a number of banks which provide Islamic mortgage products,
including Bristol & West, HSBC and the Islamic Bank of Britain among
others.
Can I Get Repossessed if I Have an Islamic Mortgage?
Unfortunately yes, you always at risk of repossession if you purchase
a property with the benefit of a mortgage and fail to keep up
repayments.
I’ve Heard I Might Have to Pay Two Lots of Stamp Duty?
It used to be the case that with a Islamic mortgage, you had to pay
stamp duty once on the original purchase and again at the end of the
mortgage term when the bank transferred the property to you, but this
was remedied in the Finance Act 2003 and is no longer the case.
I’m Not a Muslim, So Why Would I Get an Islamic Mortgage?
One advantage of the Murabaha type of mortgage is that the payments
are fixed throughout the life of the term. This means you don’t have to
worry about your payments increasing to a level you can’t afford if
there is a sharp rise in interest rates, as would happen with a
conventional mortgage. Obviously the disadvantage is that you would not
benefit from any decrease in interest rates.
The monthly payments on this type of mortgage will be calculated
based on the interest rate prevailing at the time so while rates are
low, although initially the payments will be higher than a traditional
mortgage (the bank will set the payments higher because they know they
cannot be changed), over the life of the mortgage as interest rates but
your payments don’t, you may well end up better off.
With the Ijara type, payments are reviewed annually and will increase
and decrease in line with interest rates.
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