Islamic Financing

A Guide To Islamic Mortgage and How it Works

Since traditional mortgages involve interest, which is prohibited by Islamic law, many Muslims seek Sharia-compliant alternatives for homeownership. Thankfully, Islamic finance offers several Sharia-compliant alternatives to traditional mortgages, allowing homeownership while adhering to religious principles. Here’s our guide to understanding Islamic mortgages and the various options available to help you achieve your dream of property ownership.

1. What is Islamic Mortgage:

mortgage and funding

Sharia-compliant financing offers alternative paths to homeownership that adhere to Islamic principles. These plans function similarly to rent-to-own agreements, but without interest charges. The bank acts as a facilitator, purchasing the property on the buyer’s behalf and holding legal title initially. Monthly payments go towards rent for the bank’s ownership share and a portion that gradually buys out that share. By the end of the term, the buyer will either have fully acquired the property or have a remaining balance to settle before legal ownership is transferred.

2. What Are The Types of Islamic Mortgage:

Islamic financing offers several alternatives to traditional mortgages, allowing you to achieve homeownership while adhering to Sharia principles. Here’s a breakdown of the three main options:

i: Ijara (rent-to-own):

Imagine Ijara as a rent-to-own plan. Your monthly payments are divided into two parts: rent and a portion towards eventually purchasing the property. This means your ownership share remains constant throughout the term, gradually building equity with each payment.

ii. Diminishing Musharaka (partnership purchase):

Diminishing Musharaka involves a joint purchase agreement between you and the Islamic bank. You essentially become partners, co-owning the property from the outset. Your monthly payments go towards buying out the bank’s share, increasing your ownership percentage as theirs decreases.

iii: Murabaha (cost-plus sale):

Murabaha operates like a marked-up purchase plan. The bank acts as a middleman, buying the property and then selling it to you at a pre-agreed profit margin. You then repay the total cost (including the profit) in installments.

It’s vital to carefully evaluate the potential advantages and drawbacks of each option before making a decision. This will ensure you choose the Sharia-compliant home purchase plan that best suits your financial goals and situation.

3. Are There Any Risks in Islamic Mortgage:

process of solicitor to do

While the bank holds legal ownership during the financing period, you’ll still be responsible for certain ongoing costs:

  • Property Insurance: Protecting the property through insurance is essential.
  • Maintenance: You’ll shoulder the responsibility for general upkeep and repairs.
  • Upfront Fees: Similar to traditional mortgages, you’ll need to cover conveyancing (legal fees) and stamp duty (government tax) associated with the initial property purchase.

Understanding Rent Calculations:

It’s important to note that some Islamic mortgage providers base their monthly payments (often referred to as “rent”) on a benchmark called LIBOR, rather than local rental averages. This approach can be advantageous or disadvantageous:

  • Potential Benefit: If LIBOR is lower than average local rents, your monthly payments might be lower.
  • Potential Drawback: Conversely, if LIBOR is higher than local rents, you could end up paying more than expected for your location.

Therefore, it’s crucial to thoroughly understand how your chosen provider calculates monthly payments before entering into an agreement.

4. Deposit Requirements for Islamic Mortgages:

To be eligible for a Sharia-compliant home purchase plan, you’ll typically need to make a down payment of at least 20%. This initial contribution represents a significant portion of the property’s value and demonstrates your financial commitment to the purchase.

5. Where to Find Sharia-Compliant Mortgage Providers:

islamic mortgage guide

While Islamic banks offer Sharia-compliant home purchase plans, you’re not limited to them! Many traditional UK banks and building societies also provide these alternatives.

To navigate the various options, consider consulting a halal mortgage broker specialist. These experts possess experience with Sharia-compliant financing and can guide you through the different products available.

6. Peace of Mind with Regulation:

It’s important to note that the Financial Conduct Authority (FCA) regulates Islamic mortgages and home purchase plans. This means all providers are legally obligated to prioritize your financial well-being and act in your best interests.

Contact us:

With expertise in Sharia-compliant financial solutions, Ayana Properties can assist you in finding the ideal financing arrangement tailored to your needs.

Whether your goal is homeownership or property investment, Ayana Properties offers trusted guidance and support throughout the entire process. Take the first step towards achieving your financial goals with confidence – contact Ayana Properties today to explore your options and embark on this exciting journey.

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