When it comes to getting a mortgage, sometimes the considerations are more than just financial. For many, price, legal considerations and the current state of the market aren't the main focus. But, cultural and religious are.

However, what if Muslims (or other customers who want to follow Shariah law) don't want to rent for the rest of their lives? That's where Islamic mortgages come in.

An Islamic mortgage is designed for those who want to buy a house, but want to go down a halal route when applying for a mortgage. Islamic mortgages are also referred to as Shariah compliant mortgages, or halal mortgages.

In the UK, there are a range of Islamic mortgages available on the market, allowing a customer to apply for a mortgage, whilst staying halal.

We're going to take you through the basics of Islamic mortgages, the different types, how to apply for one, what the potential risks could be and where you can apply for an Islamic mortgage. Let's dive in.

Are there any disadvantages to Islamic mortgages?

How we could help you buy a home in a Shariah compliant way

An Islamic mortgage is a type of mortgage that bears 

. They work as a no-interest home purchase plan, which is also referred to as 'HPP'. This means that Muslims can apply for a legal mortgage without going against their beliefs.

The HPP will help you towards buying a property. You'll essentially be in partnership with the Islamic bank or Shariah compliant provider, paying rent on a monthly basis.

Each rent payment will increase your ownership share of the property, and reduce the bank's financial share. In other words, the Islamic bank replaces the “interest” component with “rent”.

modern living room with brightly covered rug

The biggest difference with an Islamic mortgage, is the fact that you don't have to pay any interest.

It's against Shariah law to apply for a loan with interest. This comes from the fundamental belief in Islamic finance, that 

money shouldn’t have any value in itself. It’s just a way to exchange products and services that do have a value.

Because paying interest is the concept of making money from money, it goes against Islamic finance beliefs. Therefore, because conventional mortgages are interest-bearing loans, Muslims will often aim to avoid these types of mortgages.

Islamic finance also encourages partnership. This could be partnership between people, businesses, or both.

Because both the buyer and the lender buy a share of the property, this ties in well with Islamic finance beliefs, making it halal. This means a customer can apply for a mortgage, without sacrificing those beliefs.

You'll need to work with a bank that offers products and services in compliance with Islamic finance laws. The bank buys the property on your behalf, which means they become the legal owner of that property. You'll then have to make monthly payments to the bank.

In this way, your monthly payments are much like rent payments, with a portion going towards buying out the property owner’s stake.

The rental rate of an Islamic mortgage will be shown as a percentage, which changes depending on the Bank of England base rate.

At the end of the fixed term, you should have either made enough payments to the bank to have bought the property back, making you the legal owner. Or, you have an outstanding fee that you'll need to pay before you own the property.

There are three main types of halal mortgages: Ijarah, Diminishing Musharaka and Murabaha. Let's take a deeper look into the three main types of these home purchase plans.

Ijarah can also be referred to as a 'rent only' mortgage.

When a customer buys the property, they'll put down a deposit, while the Shariah compliant lender contributes the rest.

With an Ijarah mortgage, you'll make monthly rental repayments on the bank's share of the house over a fixed term. However, you don't have to make any payments towards buying the bank's share of the property.

If you decide to go for an Ijarah home purchase plan, you need to make monthly payments that are part rent and part capital. These payments contribute to your final home purchase.

This type of Islamic mortgage is more often used in a buy to let context, rather than buying your own home to live in.

For example, if you're aiming to generate more cash flow, rather than owning the whole property, you might choose to go with an Ijarah mortgage.

This is because you may have to end up selling the property at the end of the term, if you still haven't paid back the bank's complete contribution.

Diminishing Musharaka is the most common HPP structure that lenders offer in the UK.

Diminishing Musharaka home purchase plans refers to a joint purchase and ownership agreement between you and your Islamic bank. In this case, you'll pay your Islamic bank's share in monthly repayments.

This means that as your ownership share grows, theirs will shrink. When you initially buy the property, you'll have to put a deposit down.

To avoid high rent costs, it's better to put down as a high a deposit as you can, at least 20% depending on what the minimum requirements are.

The Murabaha is another type of interest free home purchase plan. Your Islamic bank or Shariah compliant provider buys the property, and then will sell the property to you at a higher price.

For example, if you're looking to buy a property for £100,000, the bank may sell the property to you for £150,000. This can then be paid for in monthly instalments over a fixed term.

In the UK, a Murabaha mortgage is more often seen for commercial properties, development financing and bridge financing situations, rather than residential home purchases.

In the Middle and Far East, however, a Murabaha mortgage is viewed by Muslims as more compliant in terms of Shariah law, so it's much more common for residential properties in those parts of the world to go with a Murabaha mortgage.

What qualifies you for an Islamic mortgage?

To be able to apply for a Shariah compliant mortgage, you'll usually need to pay a deposit to the bank of at least 20% of the property.

As well as a deposit, you'll also need to budget money in for things such as surveys, building insurance, stamp duty and any other costs, such as 

Make sure you factor in those extra costs, so that you're able to keep up with your payments until the end of the term.

Can anyone apply for an Islamic mortgage?

Short answer? Yes. If you prefer the ethics behind Islamic finance, and would rather go for loans that are interest free, then the halal route might be the one for you.

An Islamic mortgage is seen as ethical because you know the full cost of the loan from the get go—there is no interest rate.

Furthermore, the money raised by 'ethical' lenders is not reinvested in industries that are not supported by Islamic beliefs. Such as alcohol or gambling.

Using an Islamic mortgage calculator will help to give you an idea of what the rate of your monthly payments might be, much like a mortgage calculator for conventional mortgages.

To get an accurate estimate of what you'll need to pay, you'll have to enter the finance amount, the product type, and the finance period.

How do you know that banks are Shariah compliant if it's not an Islamic bank?

Providers that offer Islamic mortgages should be able to provide evidence that shows they've had Shariah compliance guidance, specifically from an authority in Islamic law.

Applying for an Islamic mortgage can sometimes cost more than other types of mortgages on the market. This tends to be because the bank or lender has to pay higher administration costs.

Even though the Islamic bank or Shariah compliant provider is the legal owner of the property, you'll be responsible for other costs.

These could include the cost of conveyancing, general maintenance, and Stamp Duty. Make sure that you add these costs when you initially budget the cost of your house purchase.

You may also have to pay a higher deposit. You can apply to some other types of mortgages with a deposit as low as 5%.

However, you may have to provide a deposit of 20% or more if you decide to go with an Islamic mortgage. If you cannot afford that amount, you might run into problems very early on.

If you, as the customer, want to sell the property to another party, you'll need to repay the Islamic bank.

For example, if the original fixed term is 10 years, and you want to sell the property after 3 years, you'll need to make an early repayment to the Islamic bank. This early repayment is likely to be a much higher price than a different type of mortgage.

A way to solve this problem would be for the bank to recompute the transaction to allow a discount for early payment. However, this system would need to be evaluated to see how it complies with Shariah law.

What are the risks of an Islamic mortgage?

As with any product that involves a loan, there are sometimes some potential risks associated with Islamic mortgages.

If you're late on your mortgage repayment, or you miss the deadline, you'll most likely be fined. If you keep failing to repay these payments, your home may be repossessed.

check fine and repossession terms before you take out an Islamic mortgage, and understand the penalties for failing to keep up with your payments.

A lot of Islamic mortgage providers use LIBOR-pegged rental rates, as opposed to the average rental rate in your local area.

While this could work in your favour, it may also mean you end up spending more money more than you initially expected.

Islamic mortgages vs conventional mortgages

Islamic mortgages don't pose more risk than a conventional mortgage. As we mentioned earlier, Islamic banks are fully regulated by the Financial Conduct Authority and the Prudential Regulatory Authority. They have a strict line of conduct to follow, so as a customer you're legally protected.

Additionally, the Financial Services Compensation Scheme (“FSCS) applies to Islamic banks as well. So £85,000 of your money in a savings/current account with an Islamic bank will be secured by the FSCS in case the bank collapses.

In some ways, Islamic banks might be safer than mainstream banks. This is because activities that pose a risk, such as derivatives and exotic instruments trading, are forbidden under Islamic law, which means the banks don't engage in these activities.

Because of this, a lot of non-Muslims actually use Islamic banks. They're looking to take advantage of the market-leading savings rates offered by such Islamic banks or take out a HPP where there is no penalty for early repayment.

Modern living room with teal and turquoise decoration

There are a few Islamic banks in the UK that will offer you Islamic mortgage services and products, including buying the property on your behalf and home purchase plans.

Established in London in 2007, G﻿atehouse Bank is one of the biggest banks that follows the principles of Islamic finance. It's authorised by the Prudential Regulation Authority (PRA) and regulated by the Financial Conduct Authority (FCA) and the PRA.

UBL UK is another huge bank that operates under Islamic finance rules. It's also market regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

It was formed in 2001, following a merger of the UK branches of United Bank Limited and National Bank of Pakistan.

You can apply for an Islamic mortgage at plenty of other UK banks and building societies. These halal mortgage alternatives still follow Islamic law; the banks just don't refer to themselves as Islamic banks specifically.

Ahli's products usually tailor to those looking to buy more expensive properties, often located in London.

If you're looking for a Shariah compliant ways to buy a home, check out our introduction to Islamic mortgages, how they work and the best alternative.

Islamic Mortgages: The Shariah compliant way to buy in 2023

Buying a house for you and your family is one of, if not the biggest, investments you'll make in your lifetime.

With such a diverse population in the UK, we've seen mortgage lenders create a diverse range of home purchase plans to support those wanting to buy a house with the money available to them. It's important that those who have particular religious beliefs don't have to compromise those principles in order to get on the housing market and leave the rental payments behind.

For those in the Islamic community, there's now a range Islamic banks who offer mortgages and ownership that are compliant with Sharia law.

, it was difficult for the Muslim community to get on the property ladder using a conventional mortgage. Instead, money was spent on rental payments, with many feeling as though they weren't getting value for money. Here, we're taking a closer look at the reasons why.

Remember, whether you're entering into a conventional mortgage or an Islamic mortgage, failure to keep up with your mortgage repayments could result in your home being repossessed.

If you have questions, there are plenty of free resources out there to help you make the best decision for you and your family.

Alternatively, you can consult with a mortgage advisor who will be able to compare all the available products and advise you on the best course of action for your current financial situation.

What are the differences between a conventional mortgage and an islamic mortgage?

The main difference between a conventional mortgage and an Islamic mortgage comes down to the matter of interest and whether the bank is making profit from the loan and getting value from their investment.

Non-muslims can enter into a deal with the bank whereby they will make monthly payments with interest throughout their mortgage term.

For the Muslim community, in order to honour their beliefs, it's important to find alternatives to what the bank can offer.

For Muslims, the halal and Sharia compliant way to buy a house means finding a way to access a loan that doesn't require paying interest. Thankfully, Islamic banking helps to overcome these financial challenges in a Sharia friendly way.

Why does having to pay interest act as a barrier to the market?

Whether you're the house buyer or a lending bank, earning or paying interest (otherwise known as riba) is considered haram (not allowed under Islamic law).

The Islamic faith doesn't believe that banks should be able to profit on someone's need for a loan to help purchase assets. Buying a house isn't about making money and earning a profit. Attitudes towards finance in Islam are much more based in community.

The word “Riba” means excess, increase or addition, which correctly interpreted according to Shariah terminology, implies any excess compensation without due consideration (consideration does not include time value of money).

For this reason, many Muslims actually choose to use their money to rent for much longer, as they struggle to find compliant mortgages and don't believe owning a house is a necessity. (There are arguments for and against this among scholars, but more on that later.)

Most Muslims who want to buy property must therefore rely on Islamic mortgages to buy their home. And to do that, they'll need to find the right bank and an 

These Sharia compliant mortgages allow buyers to purchase their property in partnership with the bank. These are often referred to as a 'home purchase plan' or 'HPPs'.

Islamic mortgages that are considered halal

There are a number of ways you can get the home you want in a halal way and different to traditional banking.

A home purchase plan can be one of three types: Ijara, Musharaka or Murabaha. These make it more possible to get the property you want while following Islam.

If you're ever in doubt about whether a mortgage follows Sharia law, there are a number of scholars and authority figures within Islamic law that have authorised home ownership agreement products.

You can always ask your lender for more information if you need to.

With an Ijara agreement, the islamic bank will purchase the property and lend it to the homeowner on a fixed term. Similarly to renting, you'll make fixed monthly payments.

When the fixed term is complete, the ownership of the property will be transferred over.

In a diminishing musharaka agreement, both the home buyer and the islamic bank buys a share of the property. This system is one of the most common agreements in the UK.

Let's say in this example, Al Rayan (the Islamic bank of Britain) has an 80% stake in the house. The main difference between this Islamic mortgage and a conventional mortgage is that instead of an £80k debt, the bank buys 80% and holds that amount on their accounts.

When you pay back the bank (payments are usually made up of part capital and part rent), the percentage of property owned increases. The share of the bank on the other hand, decreases.

As you continue making payments, your rent will reduce. At the end of the agreement, you'll have bought the bank's share in the property.

Murahaba agreements consist of the islamic banks buying the property on behalf of the buyer. They will purchase the property for a higher cost and sell it back to you over time.

A common criticism of Islamic mortgages is that they tend to be much more expensive than a conventional mortgage. Mainstream banks often come out anywhere between 25% and 30% cheaper than Islamic banks when it comes to mortgages.

Islamic mortgages require the home buyer to put down a larger deposit amount when purchasing the home and monthly repayments are likely to be more money than the average. Many members of the Muslim community feel that rent would actually be cheaper. When weighing up your finance, these are the things you need to think about.

Where a number of conventional mortgage providers are now offering 5% or even 0% deposit schemes, many Islamic mortgages require a minimum of 20% to be put down in the first instance.

In some cases, the required deposit may even be in the region of 60%.

For many Muslims (particularly first time buyers), this can put getting a mortgage completely out of reach. The initial price is simply fixed too high and they aren't able to rent and save the money required for the large deposit.

It can be a big barrier for many Muslims accessing home purchase plans like 

When you compare to a conventional mortgage, it's easy to see how many people in the community have to stay in rental properties longer than they maybe would like.

While some banks have dabbled in Islamic mortgages, there are a number of high street banks where accessing an Islamic mortgage and other services isn't currently possible. Where a bank may have offered these products previously, many have stopped in recent years.

 and Al Buraq finance are known to not be offering Islamic mortgages.

Most Muslims looking for a Sharia compliant mortgage will turn to 

. The oldest and largest Islamic bank (Al Rayan Bank is sometimes known as the Islamic bank of Britain), they have the widest range of Islamic mortgage products out there and are one of the biggest players in Islamic finance.

An Al Rayan home purchase plan is the go to for many Muslims in the UK.

Potential hidden costs and concerns about insurance

Whether you're Muslim or non-muslim, you should always think about your affordability before you enter into a home purchase plan.

If the news stories of the past year have taught us anything, it's that you never know when life is going to throw unexpected curveballs at you.

One of the potential disadvantages of entering into a diminishing musharaka (for example) is that despite you and the Islamic bank sharing ownership of the property, you won't necessarily share the cost of things considered an additional necessity.

You'll be responsible for covering the cost of things such as home insurance, any cost associated with leasehold properties and general maintenance.

If you have concerns about insurance, Islamic insurance (takaful insurance) is a way to protect your valuables while still honouring your beliefs.

Takaful is a type of Islamic insurance wherein members contribute money into a pool system to guarantee each other against loss or damage. Takaful-branded insurance is based on sharia or Islamic religious law, which explains how individuals are responsible to cooperate and protect one another. Takaful policies cover health, life, and general insurance needs.

The debate between conventional mortgages and Islamic mortgages

Within the Muslim community, there are debates over whether a conventional mortgage is actually haram and whether an Islamic mortgage is truly halal.

There are plenty of resources, information in the news and helpful guides to help you compare and contrast these ideas.

There are many thresholds in Islam over what is is considered a 'necessity'. Those who feel it is within reason to take out a conventional mortgage argue that owning a house is a necessity. This is usually because they feel they could have a better quality of a life for themselves and their family if they no longer have to rent.

There are a small number of scholars who believe that typical mortgages don't constitute riba in the traditional sense. 

Shaykh Atabek Shukurov argues that banks aren't giving out money to spend on whatever you like

. They provide the loan to buy a particular property with you acting as their agent essentially.

Sh. Atabek argues that this arrangement is murabaha and therefore is compliant with Islamic law.

Critics of Sh. Atabek's point of view is that they believe the bank isn't appointing a person to buy a house on their behalf.

The banks themselves don't particularly care about the property - they just need to ensure there's enough value in the asset to create good enough security against the loan.

Critics argue that an accountant would categorise a mortgage as a debt, and therefore haram. The property itself wouldn't actually play any part in a balance sheet.

The discussion here is about whether categorising traditional mortgages as halal could open up wider allowances across mainstream commercial finance agreements.

How Wayhome is helping the Muslim community access the market through shared ownership

We believe everyone should be able to access the property you want. 

That's why we've implemented an Islamic mortgage alternative similar to diminishing musharaka.

 We've worked hard in collaboration with Mufti Faraz Adam of Amanah Advisors to ensure our Islamic mortgages are completely Sharia compliant.

With the Wayhome home purchase plans, you'll be able to buy your home with a 5% deposit and no interest, no mortgage, no debt and no fees - keeping everything halal.

Instead, we'll form a partnership with you to buy your home for cash. You pay 5%, we pay 95%. Simple. From there, you'll part buy, part pay rent on the part you don't own. The more you buy, the less your rent will be. Over time, you'll buy bigger shares in the home until you own it 100%.

There are ways you can purchase property and still respect your beliefs.

How do I know if I'm eligible for this Islamic mortgage?

We've tried to make things as simple as possible while still keeping everything halal. You'll need to produce a 5% deposit and we'll do the rest.

The only other criteria is your household income must be a minimum of £24,000 a year.

How will I know this Islamic mortgage is definitely Sharia compliant?

We work closely with Amanah Advisors to ensure our services remain compliant with Islamic law.

If we intend to change our products, they must go through a thorough audit with Amanah Advisors before we announce the news to our customers.

Will I need to get insurance like I do on a home purchase plan?

There are a number of Islamic mortgages that require you to take out comprehensive insurance as an added security measure.

At Wayhome, we want to protect your purchase, but ourselves too. We (Wayhome) take out an insurance policy that covers both parties. But as we're the ones taking out the policy, we'll be the ones paying the premiums to the insurers. You'll simply add on the price of what we call 'home support costs' to your monthly payments. For example, if the price of your home support costs is £4.50

We'll never insist you take out contents insurances or any other insurance. But it's always a good idea to explore your options and protect your valuable items whilst honouring your beliefs - Islamic insurance (Takaful) for example.

While there may be more things to navigate for Muslims trying to access mortgages, it's clear that there are options available that don't require you to pay interest. Accessing an Islamic mortgage and other Islamic finance is easy with services like Al Rayan Bank - all while remaining compliant with Sharia law.

If you're ever in doubt about how to get on the market, there are plenty of resources from a number of Muslim scholars out there that you can compare and make the decision that feels right for you. You can also speak to your bank about whether they have any Islamic finance options. There may be a deal you can reach.

At Wayhome, we believe everyone should have fair access to the market. You can always check out our free Islamic mortgage information and contact us to discuss how you want to move forward.

Please note that by giving any details to our website, you agree to our terms and conditions.

LEARN

Islamic Mortgages: The Shariah compliant way to buy in 2023

Why can't Muslims get a mortgage?