Your guide to Islamic mortgages
For many Muslims in the UK, purchasing a property is about more than just finding the right home – it’s about finding the right financial product that aligns with their religious beliefs. Under Shariah Law, paying or receiving interest (known as riba) is not allowed. As interest is paid on conventional mortgages, an alternative plan is needed – and that’s where Islamic mortgages come in.
At Attwaters, we’re proud to have Sohail Patel on our Residential Property team, who specialises in Islamic mortgages. In this blog, he explains the different types available, and how the conveyancing process differs from other property purchases.
What is an Islamic mortgage?
An Islamic mortgage, also known as a home purchase plan, is a Shariah-compliant alternative to a traditional home loan. Although there are different types of home purchase plans, they take the same general form. You (the buyer) would put down a deposit, then the Islamic bank will purchase the property on your behalf. You would then make monthly repayments to the bank, which may cover rent and/or go towards the purchase price of the property, depending on the type of Shariah mortgage:
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. Each payment increases the buyer’s ownership while reducing the bank’s share, hence the term “diminishing.” 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, they 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 pay back 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.
How does the conveyancing process differ?
There are a few key differences to the typical conveyancing process:
- Most Islamic banks appoint their own solicitors to ensure their interests are adequately protected in the transaction. So, when acting for buyers, additional work is required to answer the bank’s enquiries.
- The buyer is not noted on the Title Register for the Property. Instead, the bank is listed, and you will lease the property from them for the duration of the mortgage term.
- As the buyer’s soclitiors, we must carefully review the seller’s title documents, the lease and the mortgage documents provided by the bank. You will receive a report on the Title documents in the usual manner, plus reports pertaining to the mortgage documents, lease, and what this means for you.
Why choose Attwaters?
Navigating an Islamic mortgage requires both legal precision and an understanding of Shariah principles. 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.
