A Definitive Guide to Islamic Mortgages
Islam bans interest-bearing loans, so Muslims may look for a halal alternative when buying a home. Several Islamic mortgage options are available, allowing purchasers to climb on the housing ladder while being sharia-compliant.
What is an Islamic Mortgage?
A Sharia-compliant house purchase plan is what an Islamic mortgage is. This means that the mortgage provider will buy the property for you and then resell it to you at a higher price or lease it to you at a variable rate.
You will have a repayment schedule in place, but no interest will be charged. In either case, the mortgage provider will make a profit.
Money is seen as an object with no intrinsic worth in Islam. The fact that money may accrue interest and be worth more or less depending on outside factors would imply that it had inherent value in UK society; therefore, banks strive to avoid this by removing interest from the equation entirely under Islamic banking.
What is the process of obtaining an Islamic mortgage?
You will enter into a contract with the seller and agree on a price, just like you would when purchasing a property with a traditional mortgage. The property will subsequently be purchased from the seller by your Islamic mortgage provider. A typical mortgage would transfer the money to you to deliver to the seller, and you would then be obliged to repay it with interest.
The Islamic mortgage provider owns the property and sells it back to you at a greater price. You may still pay it back in installments, just like a regular mortgage, but you won’t have to pay any interest. However, the rate may change based on market rental costs under an Islamic mortgage leasing or rental arrangement.
The procedure is as follows:
- Locate a property and reach an agreement with the seller on a price.
- The Islamic mortgage provider will purchase the seller’s property.
- The Islamic mortgage company will resell the property to you at a greater price.
- You repay the increased price of the property in installments.
Types of Islamic Mortgages
There are three kinds of Islamic mortgages.
- Diminishing Musharaka
For British Muslims, an ijara agreement is typically the most popular and cost-effective choice. This house purchasing strategy is founded on the Ijara philosophy of “lease to own.”
Ijara works as follows:
● You locate a house you wish to buy and negotiate a price with the seller; the Islamic mortgage provider purchases the property on your behalf, and you pay a deposit (usually a minimum of 10 percent )
● You make monthly installments, paying a portion of the purchase price plus an agreed-upon sum of rent.
● Term lengths are typically 25 years.
● When you have fully returned the purchase price, ownership of the property is passed to you. The rent reduces each year as your part of the property rises. You can pay off the outstanding debt at any time.
A hypothecary musharaka is a joint ownership deal with the bank. You have a share, and the bank owns the other portion of the property.
So works Musharaka:
- Find a residence that you wish to buy and agree to a price for that seller that the Islamic bank purchases along with you a deposit (typically 5 to 20 percent )
- You pay rent on the part of a property owned by the bank, and you will ultimately own both the bank’s piece of the property and your share in the property.
The mortgage provider purchases the property on your behalf under a Murabaha agreement. The property is then sold to you at a greater price.
In the UK, this is a less common alternative, with only a few lenders offering it.
Murabaha works as follows:
- You locate a house you wish to buy and reach an agreement with the vendor; the Islamic bank purchases the property on your behalf; the bank sells the property to you at a higher price; and you pay a deposit (generally at least 20 percent )
- You return the balance of the loan in set installments until you buy the property. Terms are typically for a maximum of 15 years.
What fees will I have to pay for an Islamic mortgage?
There is an admin charge, just like a conventional mortgage, although it is generally significantly cheaper. Because Islamic mortgages are not technically mortgages, they have fewer fees and levies associated with them.
An Islamic home purchase plan indicates that the bank owns the property and that you must purchase it from them rather than repay it. Thus the procedure is significantly simpler overall.
However, halal finance is becoming more common, and some believe it is only a matter of time until it becomes as competitive as a regular mortgage.
Unfortunately, one significant cost associated with an Islamic mortgage and the hire buy plan procedure is that you may be required to pay Stamp Duty twice. Furthermore, you will also have to pay conveyancing charges, surveys, legal fees, construction insurance, and house upkeep.
Is it necessary to pay stamp duty twice if you have an Islamic mortgage?
If the property is valued more than the Stamp Duty Land Tax threshold, twice an Islamic mortgage will be required.
This is because your bank first buys and sells you the house. In all cases, you have the responsibility to pay the stamp duty.
Any sum above £125,000 is subject to Stamp Duty. If you buy a property with an Islamic mortgage, this cost may be treble, so consider it before passing up a regular bank financing option.
What is Finance to Value?
Finance to Value (FTV) indicates how much financing the bank will give in relation to the property’s value. The FTV is similar to the loan to value (LTV) ratio on a typical mortgage.
Each Islamic mortgage will have a maximum FTV indicated as a percentage. The deposit may be calculated using the FTV. This is frequently referred to as the “first payment.”
A deposit of at least 20% of the property’s worth is usually required. For example, if a house purchase plan has a maximum FTV of 80%, you’ll require a 20% deposit. Typically, the lower the FTV, the lower the cost of your home buying plan.
Where can you find Islamic mortgages?
Sharia mortgage options are available at numerous UK banks and building societies, not simply those that advertise themselves as Islamic banks. There are many individual no-interest programs available within the three major types of purchasing plans discussed here, so it’s worth searching around for the best offer.
A mortgage broker with knowledge in this sort of mortgage option can assist you in deciding amongst the several solutions offered. Your broker can also help you with remortgaging, which can be difficult with Islamic mortgages.
The Financial Conduct Authority regulates Islamic mortgages and house purchase plans, which means that all providers are legally obligated to safeguard your interests.
Should I Get an Islamic Mortgage?
If you want to adhere to Sharia law, an Islamic mortgage allows you to do so while purchasing a house.
Even if you are not Muslim, an Islamic mortgage may provide you with ethical peace of mind.
Purchasing a home is a significant and costly investment. However, if you plan ahead of time and are knowledgeable about the subject, you may save thousands of dollars and obtain a low-cost Islamic mortgage. At MBD (Mortgage Brokers Directory) we have some of the UK’s largest suppliers of Islamic mortgages on board, who can offer you the best deals on the market.