Which lenders offer Islamic mortgages and how do I go about getting one?
Question
I've recently heard a lot about Islamic mortgages in the media and was curious whether they are a better option than a standard mortgage. Do you have to be Muslim to take one out? Furthermore if I were set on getting an Islamic mortgage, where exactly would I go in order to get accepted for one, could I go to the local high street banks or would I need to apply at an international bank?
Answer
There are a number of differences between an Islamic mortgage and a standard mortgage. And while you don’t necessarily have to be a Muslim to take one out you need to look at all the options available to see what is best for your circumstances.
Shariah Islamic law says the charging of interest is not permitted as this is usury. Therefore, the overarching principle of Islamic finance is that all forms of interest are forbidden.
The Islamic financial model works on the basis of risk sharing. The customer and the bank share the risk of any investment on agreed terms, and it works along the following lines. First of all you find a property, agree a price, and undertake a survey and searches. Your bank then enters into a contract with the vendor to buy the property from vendor and then the bank then sells property to you at higher price. The higher price is paid by you in equal instalments over a fixed term.
The two main types of mortgage are Ijara and Murabaha. With an Ijara mortgage, the property belongs to the lender after they have purchased it and you will make monthly rental payments to them. You have to enter into a lease agreement with them and make monthly repayments which are a combination of rent and payments towards the amount paid by the bank to buy the property. The monthly payments are usually fixed annually although some products allow you to pay off the remaining balance early without redemption penalties.
With a Murabaha contract, once you’ve chosen a house you want to buy, the bank will buy the property on your behalf and then sell it to you at a higher price. The bank applies an additional charge on top of the amount the bank has paid to buy the property - which is regarded as profit. It requires a larger deposit than an Ijara mortgage (typically around 20%), but once you have paid this the property will be registered in your name and you will then pay the remaining debt at a fixed rate over an agreed period of time.
Islamic mortgages are available from a number of banks in the UK. HSBC is the only high street bank to offer an Islamic mortgage service, but smaller specialist banks such as Ahli United Bank, Alburaq, Islamic Bank of Britain have Sharia products. Limited availability is in part due to the specific permissions required from the FSA, and companies and their staff will need appropriate qualifications to advise on the product.
Islamic mortgages tend to have less features than the mainstream mortgage market, as a result pricing can be higher due to reduced competition and availability. Alburaq, for example, has a minimum advance of £500,000, so is only accessible to a small percent of high earners. Depending on your criteria it may be possible to find better ‘mainstream’ mortgage options.
