What is an Islamic Mortgage?
What is an Islamic Mortgage?
You may be wondering what is an “Islamic Mortgage”. Very simply an Islamic Mortgage is a term used to describe a sharia compliant method of purchasing a property. The method used to make the purchase avoids all things which are prohibited within Islam such as the use of interest, speculation, uncertainty etc.
Why take out an Islamic Mortgage?
As muslims we are required to live our lives in accordance to the requirments of our faith. One of the most serious prohibitions in our faith is the use of interest. Practising muslims living in the west have either decided to rent their homes in the past or have felt compelled to take out a conventional bearing mortgage as no sharia compliant alternatives have been previously available. Over the last decade however several lenders have began to offer Islamic Mortgages. Now that there are genuine sharia compliant Islamic Mortgages available in the market place which have been approved by leading Islamic finance authorities we must seriously consider these options if we hope to live our lives in a manner which is pleasing to our creator.
How does an Islamic Mortgage work?
In a conventional mortgage the bank simply provides the finance to the purchaser of the home who then agrees to pay back the sum borrowed over a period of time and in addition to this he also agrees to pay interest on the borrowed sum at the prevailing rate. In an convetional mortgage the bank has no element of ownership of the property but the amount borrowed is secured against the property. However in the case of an Islamic Mortgage the Islamic Bank enters into an agreement of shared ownership, therefore the bank and the purchaser own the respective percentage of the property based on their contribution of the cost of purchase. During the term of the agreement the borrower agrees to pay the bank rent which is partially based on the portion of the property the bank owns. The rent over time contributes to paying back the sum borrowed and the banks profit (which has been deferred over the term of the agreement). Over time the borrowers share in the property increases and the banks share decreases and therefore generally if the same amount is being repaid monthly over the course of the mortgage then a larger percentage will go towards the repayment of the actual loan and less will go to the bank as rent. Some lenders also offer a rent only Islamic Mortgage. Here again there is shared ownership of the property based on the contribution of both parties in the purchase of the property however during the term of the mortgage the lender pays rent which in essence is the banks profit and does not contribute in paying back the actual loan amount (the banks contribution in the purchase price) until then end of the term. In both of the above instances once the agreement comes to an end the full ownership is then passed from the bank to the other party.
Islamic Mortgages A Viable Alternative to Interest Mortgages
We have now entered the dawn of a new era in the West and we have available to us viable alternatives to conventional interest based mortgages. Furthermore these mortgages have been approved by many leading scholars. The banks offer many different types of shariah compliant mortgages allowing you to finance the purchase of your home or the purchase of a buy to let property. If you want to purchase a new house, you already own a house and wish to buy another house to live in, you are refinancing or trying to release additional capital we can help you.
What are the key differences between an Islamic Mortgage and a Conventional Mortgage?
The underlying principle of shariah finance is that money cannot be generated from money i.e. interest . Some form of transaction has to take place between the vendor and the buyer. In the resultant transaction if a profit is made this is acceptable.
In addition to this ownership has to pass from the vendor and seller. In a conventional mortgage the bank merely facilitates the financing of the home and charges interest for this, a separate transaction occurs for the sale and purchase of the house between the vendor and the buyer. In the Shariah home finance model regardless of which type of instrument we are considering the bank at some point owns the property and at some point passes the ownership to the person who has taken out a mortgage with them. In general the schemes currently offered by the various shariah banks fall in to one of the two following categories.
a) The bank passes on the ownership at the end of the term of the agreement and purchaser will pay a lump sum at the end to take ownership after having paid rent during the term.
b) Alternatively ownership will be passed on after the purchaser has agreed to pay for the property on a deferred basis over the term agreed upon, the repayments will cover the original cost of the property and the profit or rent which has been pre agreed.
The key differences mentioned above distinguish these mortgages from the conventional interest bearing mortgages. Furthermore these mortgages have been deemed acceptable and they have been approved by leading Islamic scholars in Islamic finance. Any of the shariah banks we work with will be glad to provide you with the details of their shariah compliance upon request
What we offer you
If you are considering the purchase of a house and are looking for a Shariah Compliant Mortgage you have come to the right place. The fact that you are visiting this website suggests you are aware of the prohibition for a Muslim to give or receive interest (Riba). As you will be aware there are many verses in the Holy Quran and Ahadith (Prophetic Narrations) that clearly prohibit the use of Interest.
Do you qualify for a Shariah Compliant Mortgage?
All you need to do is check the general criteria for qualification, complete our short online form by supplying us with the basic details of your requirements and we will do the rest and put the lenders directly in touch with you!