Islamic
Mortgages

What is an Islamic mortgage?

Under Shariah Law, paying or receiving interest (known as riba) is not allowed. Islamic mortgages, also known as home purchase plans, offer interest-free alternatives to a conventional home loan.

There are three main types of Islamic mortgages used in the UK:

Diminishing Musharaka

This is the most common type of Islamic mortgage in the UK. Under this structure, the homebuyer and Islamic bank purchase the property jointly. The purchaser then slowly buys the property back from the bank by paying rent on the bank’s portion. This structure is very similar in effect to a repayment mortgage but is structured to avoid interest.

Ijara

With an Ijara or “rent-only” mortgage, the Islamic bank buys the property and leases it to the buyer. It is similar to a traditional interest-only mortgage.
Unlike the Diminishing Musharaka, the buyer does not gradually purchase the bank’s share. Instead, you would pay monthly rent on the bank’s portion of the house. This sort of mortgage is typically not advisable if you want to live in the home, as you may have to sell your house at the end of the term to repay the bank. However, an Ijara mortgage is sometimes used for buy-to-let investments, where cash flow is a higher priority than ownership.

Murabaha

Under a Murabaha structure, the Islamic bank will purchase a property on your behalf, then sell you the same property at a marked-up price. You will then make fixed payments to the bank over an agreed length of time (eg. 20 years). In Britain, Murabaha plans are sometimes seen in a buy-to-let scenario, commercial property development financings, and bridge financing situations. They are not often used for a residential Islamic mortgage.

Here to help

Navigating an Islamic mortgage requires both legal precision and an understanding of Shariah law. Sohail Patel and the Attwaters Residential Property team have the experience to guide you through these unique transactions smoothly.

If you’re considering an Islamic mortgage, or simply want to understand your options better, get in touch with Sohail today on sohail.patel@attwaters.co.uk or call 0203 871 0047.