Updated: January 06, 2022

Islamic Halal Mortgages

Looking for an Islamic Halal mortgage in the UK? Find out how to get one, and how to make sure it is Sharia-compliant, in our in-depth guide.

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Pete Mugleston

Author: Pete Mugleston - Mortgage Expert

Updated: January 06, 2022

Islamic mortgages are an alternative to conventional mortgages for Muslims who are seeking a Sharia-compliant form of finance. But how exactly do they differ from other types of home loans and how can you get one?

This guide will provide answers to all those questions, explain the eligibility criteria and how you can get access to the best lenders for Halal mortgages.

What is an Islamic mortgage?

An Islamic mortgage is a Sharia-compliant home purchase plan (HPPs). This means it is a mortgage that’s compliant with Sharia law and, as such, differs from traditional home loans in that they don’t involve paying interest, as that’s forbidden under Sharia law. In many ways they do not resemble a traditional mortgage arrangement.

To qualify for a Sharia mortgage, you’ll typically need a larger deposit of at least 20% of the property. For example, this means that in some mortgages the bank will buy the property for you, and sell it back to you for a higher price or lease it to you at a rate that could fluctuate.

So, rather than lending someone money and charging interest on this amount, as under the usual mortgage arrangement, a bank will purchase a property on a buyer’s behalf (becoming the legal owner). The buyer agrees to make monthly payments to the lender consisting of capital and rental for a specific term. At the end of the term legal ownership of the property passes over to the buyer.

There will be no interest involved but the bank still makes a profit, based on the principles of fair trade.

What makes Islamic mortgages Sharia compliant?

For one, Islamic mortgages aren’t actually mortgages at all, they’re HPPs. So, nobody is making money out of money, which is forbidden under Islamic law.

Rather than fitting the classic definition of a mortgage, they’re actually a business partnership between an individual and a lender. This agreement falls under the acceptable principle of fair trade, which is not forbidden.

Islamic faith states you are only allowed to create wealth if it is based upon fair trade where the risks and rewards can be shared equally. This means any form of finance that requires you to pay interest on money borrowed – like a traditional mortgage – is not allowed under Sharia law.

Using our unique advisor-matching service we can introduce you to an appropriate professional, experienced in all forms of Islamic finance who will be able to help you find which lenders can offer this type of borrowing.

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What are the different types of Islamic mortgages available?

There are 3 different types of Islamic mortgage. They all differ in their approach, but are fully compliant with Sharia law.

Diminishing Musharaka (partnership)

A Musharaka mortgage is essentially a co-ownership agreement. You and the bank both own a separate share of the property. Each time you make a repayment, which comprises part capital and part rent, you buy more of the bank’s share.

This means each month you own a little bit more of your home. Over time, your rent will reduce as your share grows and, eventually, you’ll buy the bank out and own the whole property.

Ijara (leasing)

An Ijara mortgage is when the bank purchases the property you want to buy and leases it to you for a fixed term. You pay an agreed monthly cost during this term. When the term is over, the full ownership of the property will be transferred to you and the home will be all yours.

Murabaha (profit)

A Murabaha mortgage is when the bank buys the property on your behalf. They then sell the property to you at a higher (usually pre-agreed) price. You repay the higher price in equal instalments over a fixed term.

The higher price is calculated to be the amount of interest you would have to pay under a traditional mortgage arrangement.

For example, you may want to buy a house valued at £200,000, but the bank may sell the property to you for £250,000.

The profits made here are deemed fair trade, so are acceptable under sharia law.

How to get an Islamic mortgage

If you’re looking to get an Islamic mortgage, there’s a few simple steps you can take at the outset to make the process much more straightforward.

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Get your documents ready:

Having your paperwork ready in advance can help you save precious time. You’ll need proof of your identity (a valid passport or driving license usually suffices).  You will also need three months of bank statements, proof of address and proof of income, among other documents. You can find a full list of the paperwork you’ll need in our complete guide to mortgage applications.

Check your credit reports:

Islamic mortgage lenders will still check your credit reports, so it’s a good idea to get ahead of the game and check them before you get started. It’s a good idea to check all of your credit reports before you get started. This will allow you to prepare for any hurdles you might face, as well as challenge inaccuracies and have outdated information removed. You can download your credit reports through our dedicated credit reports hub.

Speak to a mortgage broker:

Once you’ve got your documents together, you should speak to a mortgage broker who specialises in Sharia compliant mortgages. Your broker will be able to guide you through the process and offer you tailored advice for your own circumstances. This will increase your chances of getting the best deal on your first attempt.

Our unique broker-matching service is designed to match you with a broker who specialises in the type of borrowing you’re looking for. If you make an enquiry we will arrange for an experienced Islamic mortgage advisor we work with to contact you directly.

What is the eligibility criteria for an Islamic mortgage?

Despite not being a traditional type of mortgage, the eligibility criteria is very similar to other types of borrowing.

The specifics will vary between providers but will often include:

  • A minimum age of 18 or 21 if you are self employed
  • A maximum age – usually between 75 and 81
  • A maximum of four people per application
  • A minimum income – this will depend on the value of the property you are buying but is usually between £25,000 and £30,000 per annum. The lender will need to be satisfied you can meet your monthly payments.
  • Early settlements are not allowed. You’ll need to commit to paying the monthly instalments for the whole of the agreed period.
  • Insurance. Many HPPs require you to have a specific insurance policy that both you and your lender agree to.

You will also need to agree to the following documents:

  • Co-ownership Agreement – This is a partnership agreement in which the lender agrees to sell its share of the property to you over the finance term.
  • Leasing Agreement -This is the agreement in which the bank agrees to lease its share of the property to you, and in return you agree to pay a monthly rent.
  • Legal Charge – This document gives the lender a first priority legal charge.
  • Notice to Insure – This document outlines the requirements for the buildings insurance that you will have to get.

How much deposit will you need?

The deposit requirements tend to be stricter for Sharia mortgages. While it is possible to get a non-Sharia mortgage with a deposit of just 5%, Sharia mortgages often require deposits of around 20% because lenders can view them as more risky.

If you don’t have this kind of money, don’t despair. The exact requirements can vary between providers and if you speak to a broker they can help you find a lender that could offer a Sharia compliant mortgage with a lower deposit.

How can you find the best lenders and rates?

As a highly specialised product, there aren’t many mainstream lenders for Islamic mortgages in the UK. The main lenders offering them are: Al Rayan Bank (formerly Islamic Bank of Britain); Ahli United Bank; Gatehouse Bank; and Wayhome.

You can approach one of these lenders directly, but you may miss out on finding the best deal for your personal circumstances. Any lender you approach will only speak to you about their own range of products. An independent mortgage broker who specialises in Sharia-compliant deals would be able to advise on the whole market.

Finding the right Islamic mortgage for you

Finding the best Islamic mortgage can be tricky, with only a limited number of providers, but with the right guidance and expertise you can identify the right one for your circumstances.

This is where we can help. We can introduce you to a mortgage broker already experienced in helping people get Islamic mortgages. So, give us a call on 0808 189 0463 or get in touch and we can arrange for a free, no obligation chat with an advisor we work with straight away.

FAQs

Can you be sure your mortgage is Sharia compliant?

Yes you can. Lenders who offer Islamic mortgages should be able to show that they’ve received Sharia compliance guidance from an authority in Islamic law.

Are Islamic mortgages more expensive?

This will depend on the lender you choose and the terms you agree. Islamic mortgages can come with higher administration fees than traditional mortgages.

Do you have to be a Muslim to get an Islamic mortgage?

No, not at all. Islamic mortgages are available to anyone regardless of faith. If you’re looking for a more ethical form of finance or like the idea of a Home Purchase Plan then you can apply for one.

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We know everyone's circumstances are different, that's why we work with mortgage brokers who are experts in all different mortgage subjects. Ask us a question and we'll get the best expert to help.

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Pete Mugleston

Pete Mugleston

Mortgage Expert

About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

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FCA Disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms that are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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