HALAL MORTGAGES: All You Need to Know

halal mortgages
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Because interest-bearing loans are forbidden in Islam, Muslims may want to look for an Islamic mortgages in the UK that is halal and works as an alternative when buying a home. There are a variety of Islamic mortgage options available, allowing sharia-compliant purchasers to climb the property ladder.

Islamic Halal Mortgages

A halal mortgages is one that adheres to Islamic Sharia principles about mortgages, money, and borrowing. When it comes to halal mortgages, the way it works is that the financing arrangements must adhere to Sharia law standards, and many Muslims in the UK are looking for support for a kosher mortgage and home finance products and services when they are thinking about migrating.

When comparing the financing of halal mortgages to standard mortgages. The key distinction is that halal mortgages do not require the payment of interest. The process of getting a halal mortgage differs slightly from getting a standard mortgage, although it is otherwise fairly similar.

Halal mortgages were designed to allow Muslim customers to purchase real estate using Sharia-compliant finance products as an alternative to normal mortgages on the market.

How do Islamic mortgages halal UK Work?

You will enter into a contract with the seller and agree on a price, just like you would when purchasing a home with a traditional mortgage. Your halal mortgage provider will then purchase the property from the seller for a deposit of between 5% and 35% of the purchase price. With a traditional mortgage, the money is transferred to you to provide to the seller, and you must subsequently repay it with interest.

With an Islamic halal mortgage, the bank owns the property and either charge you rent to pay off a portion of its share each month or sells it back to you at a higher price for a fixed sum each month. You still pay for the property in monthly installments, just as you would with a traditional mortgage. But you don’t have to pay any interest.

The rate on an Islamic mortgage rental agreement may change, although most options, like many normal mortgages, have an initial fixed length.

The process works like this:

  • Find a property, and agree a price with the seller
  • The 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 higher price 
  • You pay for the property in instalments until you fully own the property

Types of Islamic halal Mortgages Available in the UK

#1. Diminishing Musharaka Islamic mortgage

The declining musharakah structure is the most popular in the UK, and you’ll almost probably be using it if you’re getting an HPP. The buyer and the Islamic bank will jointly purchase the property under this structure. The buyer then gradually reclaims the property from the bank by paying rent on the bank’s half, as described above.

However, the buyer will be required to put down a deposit at the time of purchase. The lowest deposit currently available on the market is 5%. But if you want to avoid paying high rental fees, you should strive for at least 20%.

#2. Ijara Islamic mortgage

The ijara mortgage is similar to the decreasing musharakah, with the exception that there is no “diminishing.” Let’s say you pay £100,000 for a house, put down £20,000 as a deposit, and the bank contributes £80,000. You pay the monthly rent on the bank’s half of the house under an ijarah or “rent-only” mortgage. But you don’t make any payments toward buying the bank’s portion.

This type of mortgage is normally not recommended for a home purchase where you intend to dwell since it may require you to sell your home at the end of the term to repay the bank for its £80,000.

This form of mortgage, on the other hand, is frequently found in buy-to-let situations. Where people are more concerned with generating as much monthly cash flow as possible rather than actually owning more of the property.

#3. Murabaha Islamic mortgage

A Murabaha structure involves an Islamic bank purchasing a property on your behalf and then reselling it to you at a higher price.

So you go to an Islamic bank and say, “I want this £100,000 property.” The bank agrees, appoints you as its agent, and you proceed to purchase the property on behalf of the bank. The property is presently owned by the bank.

The bank now buys you this home for £125,000 with a 20-year payment plan, and you now own it (subject to you keeping up with your payments).

The Murabaha structure is sometimes used in buy-to-let arrangements, commercial property development financings, and bridging financing scenarios in the United Kingdom. It’s not something you’d expect to see in an Islamic mortgage for a home. It is, however, far more prevalent in the Middle East and the Far East. From a sharia standpoint, the majority of Middle Eastern and Far Eastern scholars approve of this framework.

A commodities Murabaha structure is not the same as a Murabaha structure (also known as tawarruq). Due to sharia compliance considerations, we prefer other structures over a commodities Murabaha structure at IFG. You can learn more about that structure and why we don’t like it by clicking here.

What fees will I need to pay on halal mortgage?

There is an admin charge, just like with a traditional mortgage, although it is usually smaller. Because halal mortgages work in the UK aren’t really mortgages, they usually have lower fees and levies.

In an Islamic house purchase plan, the bank owns the property, and you buy it from the bank rather than repaying a loan, therefore the process is often simpler.

However, this does not imply that halal mortgages are less expensive, its work is extensive too. Islamic mortgages are generally more expensive and less competitive than conventional mortgages. This is partly due to the lack of halal mortgage options on the market, which means there is minimal competition.

Halal financing is growing more popular, and some believe it will only be a matter of time until it becomes as competitive as the conventional mortgage market.

Do you have to pay stamp duty twice with an halal mortgage?

If the property is over the threshold for paying stamp duty land tax. You will have to pay it when the property is bought at the outset. The current threshold for paying stamp duty is any amount over £125,000. 

It used to be the case that you had to pay it twice with an Islamic mortgage. This is because your bank is buying the home first and then selling it to you when ownership is eventually transferred to you and stamp duty was charged on both. However, the law was changed in 2003 to stop this.

Where can you find an halal mortgage in the UK?

Because Islamic mortgages are in low supply, they are generally far more expensive than conventional mortgages. Halal mortgages work by Al Rayan Bank (previously Islamic Bank of Britain) and Gatehouse Bank in the United Kingdom.

They offer halal savings accounts as well as Sharia-compliant mortgages and other Islamic financial services.

Islamic money is gaining popularity, and it isn’t only for Muslims. The bank’s ethics play a role in whether or not an Islamic mortgage is Sharia-compliant. Islamic banks, for example, will not invest their profits in gambling, alcohol, tobacco, or pornography. One of the reasons why non-Muslims are interested in Islamic mortgages is because of this.

What are the risks of an halal mortgage?

If you pay rent, the price can fluctuate depending on the market. On these types of arrangements, Islamic mortgage lenders will normally offer a fixed rate as an introductory offer.

Despite this risk, you may end up paying less in the long term than if you chose a plan in which the bank sells the property back to you at a higher price for a set monthly payment. These, on the other hand, provide you with a clearer picture of the cost from start to finish.

The bank is also taking on the risk with the client because the amount it charges you will remain the same during your agreement to buy it back, regardless of what happens in the economy or interest rates.

If you go behind on your payments, you may be fined and your property may be repossessed by the bank so it may sell it to recoup its losses, just like with a traditional mortgage.

Islamic mortgages are regulated by the Financial Conduct Authority in the same way that all other residential mortgages are, ensuring that you receive the same level of consumer protection.

Which Banks Do Not offer Halal Mortgages UK?

Before we go over the Islamic banks that currently offer Islamic mortgages. It’s vital to clear up some misconceptions about banks that have dabbled in Islamic finance in the past. The following banks do not now offer Islamic mortgages, despite what this article claims:

#1. HSBC

HSBC is the largest bank in the United Kingdom, and it has dabbled in Islamic finance under the Amanah Finance brand. However, this program is no longer active, and HSBC has been out of the Islamic mortgage market for several years. Any opposite information is untrue.

#2. Lloyds

Islamic mortgages and Islamic current accounts were once available through Lloyds. In 2018, they sadly abolished the Islamic current account. In the past, they had also eliminated Islamic mortgages from their service.

#3. Al Buraq Finance

Under the moniker “Al Buraq,” Arab Banking Corporation used to offer Islamic mortgages in cooperation with Bristol & West. They have not, however, offered Islamic mortgages in a number of years.

Which Banks offer halal Mortgages in the UK

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

The largest and oldest Islamic bank is Al Rayan Bank. They offer the most comprehensive selection of Islamic mortgage solutions on the market and are well-capitalized. That latter point is crucial since banks sometimes claim to be willing to give out mortgages when they don’t actually have the funds to do so on a large scale. Al Rayan is one of them.

When it comes to 95/90 percent LTV Islamic mortgages, Al Rayan is the go-to bank, and they’re ready to launch a commercial development package as well. They are, on average, a little more lenient in their underwriting than Gatehouse.

#2. Gatehouse

Gatehouse was founded in 2007, although it is only now beginning to offer retail HPPs and Buy-to-Lets. It wants to expand swiftly in this market, thus it has aggressively undercut Al Rayan on some of the most important HPP goods (e.g. the 80 percent LTV Islamic mortgage).

We expect customer service standards and pricing to increase as a result of this competition. Which is only beneficial for the Muslim consumer.

#3. Al Ahli

NCB, the Middle East’s second-largest banking firm, has a UK arm called Ahli. They’ve been offering HPPs for a while, but their typical clientele is individuals trying to buy larger, more costly homes in the London region.

As a result, their products aren’t suitable for the vast majority of people. But where they are (for example, a 65 percent LTV mortgage in London for a loan of over £250,000), they frequently provide competitive rates. So, if you currently have an Islamic mortgage and want to refinance, Ahli may be worth looking into.

#4. Heylo Housing

Heylo Housing is a mortgage-free option. It offers a shared-ownership approach, allowing you to acquire as much (or as little) of your home as you like.

They’re best for people who are having trouble getting an Islamic mortgage from a major Islamic bank because Heylo’s rates are usually higher and not worth it if you can get an Islamic bank instead.

They’re fantastic from a shari’ standpoint since they don’t obligate you to buy back the Heylo component of the house. Thus there isn’t a “debt-like” element to the arrangement like there is with a conventional HPP.


How much deposit do I need for halal mortgage?

20%An Islamic mortgage is one that’s compliant with Sharia law. These mortgages differ from traditional home loans in that they don’t involve paying interest, as that’s forbidden under Sharia law. In order to qualify for a Sharia mortgage, you’ll typically need a deposit of at least 20% of the property.

Is buying a house with interest haram?

“To a Muslim, it’s haram — it’s not religiously acceptable. It’s the wrong thing to do.” Koranic law forbids paying or receiving interest, or riba. Muslims who wanted to buy a home had to save hundreds of thousands of dollars, get loans from family, or swallow their faith and take out a conventional mortgage.

Is having a bank account haram?

Bank accounts typically accumulate interest over time which means many Muslims inadvertently acquire interest without actively seeking to. As per the Qur’an, in addition to it being haram for Muslims to charge interest, they cannot spend interest money in a way that benefits themselves.

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