Islamic Mortgage: How It Works & Everything You Need To Know

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Islam forbids the exchange of money for interest, hence, some Muslims prefer not to use conventional mortgages when purchasing a residence. With an Islamic mortgage, buyers have the option of financing their home in accordance with Sharia law. In this article, we will focus on how to get an Islamic mortgage through providers and banks in the UK, as well as its calculator.

Islamic Mortgage

Islamic mortgages, which are sometimes called halal mortgages or home purchase plans, aren’t mortgages at all. They aren’t even loans at all. Mortgages are loans that are offered in exchange for paying interest.

An Islamic mortgage is essentially a Sharia-compliant home-buying arrangement. So, if you’re in the UK, this means the bank will buy your property and either charge you rent until you own it outright, or sell it to you at a better price later.

In Islam, money is considered something that should not have inherent value. The idea that cash can gather interest and be worth more or less depending on outside forces would suggest that it has inherent value in UK society, therefore, under Islamic banking, the banks aim to bypass this by leaving interest completely out of the equation.

How Do Islamic Mortgages Work?

Just like buying a home with a standard mortgage, you will form a contract with the seller and agree on a price. Once you’ve given the seller a deposit of between 5% and 35%, your Islamic mortgage provider will then buy the property from them. With a typical mortgage, the money would be transferred to you to provide to the seller, and you would then be expected to pay it back with interest.

With an Islamic mortgage, the bank keeps the property and usually charges you rent, which also goes towards paying off a portion of its share each month, or sells it back to you at a higher price for a fixed sum each month. Thus, with a rental agreement on an Islamic mortgage, the rate could change, but products normally have an initial fixed length like many standard mortgages.

The procedure works like this:

  • Find a property, and arrange a price with the seller
  • The Islamic mortgage provider will buy the property from the seller
  • The Islamic mortgage provider will charge you rent on its share or sell the property back to you at a greater price
  • You pay for the property in installments until you totally own the property

What Are the Risks of an Islamic Mortgage?

If you choose a bank as the legal owner, you are still responsible for paying for the property’s insurance, upkeep, and the fees of conveyance and stamp duty when you first purchase it. These additional expenses must be added to the total cost of your purchasing plan (though, of course, this warning applies to a conventional mortgage too).

You should be aware that many Islamic mortgage providers will utilize LIBOR-pegged rental rates instead of relying on local market data to establish their rents. This could be advantageous to you, but you may end up spending more than you would have expected for your location if you take advantage of it. 

How Much Deposit Do You Need for an Islamic Mortgage?

To be eligible for a halal mortgage alternative, you’ll normally need a 20% down payment. Surveys, building insurance, stamp duty, and other expenses, such as mortgage broker fees and legal costs, should also be considered.

Islamic Mortgage UK

Many people don’t have a lot of Islamic mortgages, which is why they can be much more expensive than standard mortgages. The Al Rayan Bank (previously Islamic Bank of Britain) and Gatehouse Bank are two suppliers of halal mortgages in the UK. 

Consequently, people who work for them offer mortgages that are Sharia-compliant and other Islamic financial services, like halal savings accounts. 

Islamic money is on the rise, and it’s not only aimed at Muslims. Part of the reason why an Islamic mortgage is Sharia-compliant is due to the ethics of the bank. For example, Islamic banks will not use their profits to invest in gambling, alcohol, cigarettes, or pornography. This is one of the reasons why non-Muslims are also interested in taking out Islamic mortgages. Below are the types of Islamic mortgages available in the UK.

Types of Islamic mortgage

The three halal mortgage options are as follows: 

  • Ijara 
  • Diminishing Musharaka
  • Murabaha 

Now let us look at them one after another.

#1. Ijara 

In an Ijara home purchase plan, you pay a portion of your rent and a portion of your down payment each month. As a result, your stake in the property is secure for the duration of the contract. 

#2. Diminishing Musharaka

You and your Islamic bank enter into a joint purchase arrangement known as a “diminishing musharaka.” With monthly payments, your ownership stake grows as the provider decreases. 

#3. Murabaha 

Your Sharia-compliant supplier buys the property and sells it to you at a marked-up price, which you pay in monthly installments under the Murabaha no-interest purchase plan. When it comes to residential acquisitions in the United Kingdom, halal mortgage arrangements like these are uncommon. However, they are frequently utilized in commercial real estate development.

Islamic Mortgage Calculator

Take a look at your finances with the help of a calculator. Decide whether renting or purchasing is appropriate for you based on your budget and how long it will take to pay it off.

#1. IFG Calculator

Each bank will have its own calculators, which are essential. If you use a bank-specific calculator instead of an IFG one, you’ll only see options for that bank’s products. The calculators on IFG calculators can be used to compare various banks. Of course, you should make use of all of the resources at your disposal.

These calculators will help you get an estimate of how much money is available. We have four options:

  • Refinancing a house
  • Buying a House
  • Buy-to-Let Loans
  • Rent or Buy

For any of the first three, simply key in your product type (e.g. home refinance), the property valuation, the amount of financing you need, and the length of the term you need 

IFG: Buy or Rent Calculator

You can use this to determine whether renting or purchasing your home is more cost-effective in the long run. This specialized tool will be created with a Muslim audience in mind. Other calculators may not take inflation into account when calculating mortgage and rent payments. Purchasing costs and stamp duty are also taken into account. It also takes into account the value of your deposit if you decide to rent.

#2. Al Rayan Calculator

For each of their items, they have two calculators that are easy to use:

Home Purchase Plan

The Payments and financial commitments calculators are available for the HPP. As a result, you’ll have a better sense of how much you’ll have to spend each month toward your HPP.

Buy-to-Let Purchase Plan

In this section, you can discover calculators for payments and bank donations. Using this information, you may get a sense of how much money the bank may be able to contribute to your BTLPP, and how much you might expect to pay in interest.

#3. Gatehouse Calculator

You can figure out how much money you need and how much it will cost you using their Home Finance calculators. HPP and buy-to-let options, such as Al Ryan’s calculator, are available. However, an extra applicant’s income and credit commitment can be entered here.

Islamic Mortgage Providers

There is now only one viable option for Muslims in the United Kingdom: Islamic mortgages. Although it’s a modest market, it’s also quite new. Below are some providers of Islamic mortgage we have in the UK.

#1. Heylo Housing

There is an alternative to getting a mortgage called Heylo Housing. It allows you to reclaim as much (or as little) of your home as you choose under a cooperative paradigm of ownership.

Heylo’s rates are typically higher than those offered by regular Islamic banks, so they’re best suited to people who are unable to secure an Islamic mortgage from a normal Islamic bank.

#2. Al Ahli United

A subsidiary of NCB, the second-largest banking organization in the Middle East, Al Ahli United Ahli is based in the United Kingdom. The majority of their clients are wealthy individuals who want to purchase huge, expensive homes in the London area.

If you need a 65 percent LTV mortgage in London with a loan amount of more than £250,000, you’re likely to get a terrific rate from these lenders. So, if you’re looking to refinance your Islamic mortgage and you live in London, you might want to give Ahli a shot.

#3. Gatehouse Bank

It was only recently that Gatehouse began selling HPPs and Buy-to-let properties to the general public. It has aggressively undercut Al Rayan on some of the most important HPP goods in an attempt to quickly expand in this market (e.g. the 80 percent LTV Islamic mortgage).

Muslim consumers benefit from this competition, and we expect better customer service and prices as a result.

#4. Al Rayan Bank (formerly Islamic Bank of Britain)

The largest and oldest Islamic bank is Al Rayan Bank. And they’re well capitalized, with the greatest selection of Islamic mortgage solutions available. It’s vital to keep in mind that banks may say they’re ready to give out mortgages, but in reality, they don’t have the funds to do so on a significant scale.

Until recently, Al Rayan was the go-to bank for Islamic mortgages with a loan-to-value (LTV) of 95/90 percent. On average, they are arguably a little bit more relaxed in their underwriting than Gatehouse.

Is my Islamic mortgage Sharia-compliant? 

There are people who specialize in Islamic finance and Sharia law who are on the supervisory committees of companies that sell Islamic mortgages. They make sure the products are Sharia-compliant and that they stay that way by having regular reviews of them. Any adjustments to items are assessed by them. 

Islamic Bank Mortgage

As a result, Islamic banks are subject to strict regulations from the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA). In addition, Islamic banks are covered by the Financial Services Compensation Scheme (FSCS).

Islamic banks, on the other hand, are arguably safer than conventional banks because they do not engage in Sharia-compliant activities such as derivatives and exotic products trading.

Below are the different Islamic bank mortgage houses you can opt for.

#1. Stride up

We’ve been following Stride up for a long time and are delighted to see how far they’ve come in that time. At this time, they are working on the next stage of their product, and we anticipate that they will begin delivering HPPs in the middle of 2020.

#2. Wayhome

Wayhome, formerly Unmortgage, offers a shared-ownership model as an alternative to a mortgage. Heylo, which is well-funded, is eager to see what they can come up with when the company launches.

#3. Primary Finance

Primary Finance is a new company that is still undergoing the FCA’s regulatory process. As long as they can raise the money they need to carry out their plans, we’re all for it. Listen to our conversation with them on our podcast, which you can find right here. In a word, they provide a shared ownership structure as an alternative to a mortgage, but they believe they can do so at rates lower than those of an Islamic bank. I’m sure I’ll switch if they meet these lofty goals!

#4. UBL

According to their website, UBL offers Islamic mortgages. However, each time we’ve called, we’ve either been disconnected or the person we’ve spoken with had no idea what they were talking about. According to industry chatter, there are some regulatory difficulties being worked out in the background. In the meantime, we’re hoping that everything works out for them.

#5. Habib Bank

Throughout Pakistan and the United Kingdom, Habib Bank is a household name. They, too, are expected to begin offering Islamic mortgage products soon, according to industry sources. We are eagerly awaiting their arrival on the market!

However, we will not include any additional Islamic banks/companies until they have progressed a bit farther on their journey and are able to offer Islamic mortgages for the first time.

Islamic Mortgage FAQs

What is an Islamic mortgage?

Islamic mortgages, which are sometimes called halal mortgages or home purchase plans, aren’t mortgages at all. They aren’t even loans at all. Mortgages are loans that are offered in exchange for paying interest.

Is Islamic finance more expensive?

Many people don’t have a lot of Islamic mortgages, which is why they can be much more expensive than standard mortgages.

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