Legal

Learn More About Islamic Finance Mortgages

Islamic finance mortgages is a rapidly progressive area of finance and law in the UK, which the government has actively promoted.

05 Feb 2024

Team name
Shah Al Hoque

Shah Al Hoque

Islamic mortgages allows Muslims, and others, to buy a property whilst still complying with Sharia Law and taking their ethical and religious values into consideration.

Islamic mortgages are actually a no-interest Home Purchase Plan (HPP) because it is a lease agreement. Making money from money goes against Islamic finance beliefs.

Under Islamic mortgages, there are three different Home Purchase Plans:

  • Ijara (rent only) lease
  • Diminishing musharakah (partnership)
  • Murabaha (profit)

Diminishing Musharakah (Partnership)

The most common Islamic mortgage is Diminishing Musharakah. In this structure, Islamic banks will purchase the freehold and then sell you a lease for 99 years, to ensure you cannot be evicted like a common tenant and have enough time to pay the mortgage.  The bank will own the majority equity in the house (for example 80% whilst you would own 20%).  As you continue to live in the property and pay rent alongside your acquisition payments, you will increase your equity until you have 100% ownership of the property, and the bank has 0%. The bank will then transfer the freehold to you and the lease will be closed. This structure is commonly used for residential purchases and re-mortgages.

Ijara (rent-only) Lease (similar to an interest-only mortgage)

This HPP is where the bank purchases the property you want to buy and leases it back to you. This works similarly to a traditional interest-only mortgage, although the interest is replaced with the rental cost you pay to lease the property. This structure is commonly used for buy to let properties rather than main residence purchases.

Murabaha (Profit)

This HPP involves the lender buying the property and selling it back to you at a slightly higher price. Instead of being charged rent, you buy your home from the bank over a fixed term and pay them in equal instalments over the term. In this structure, you are the homeowner from the outset rather than a leaseholder as long as you keep up with your monthly repayments. This method is more commonly used to purchase commercial properties.

You can find out more about Islamic Finance Mortgages here.

M&P Commentary

Shah Al Hoque, a Paralegal in our residential property department, said:

“With our expertise in Islamic finance, our Conveyancing Team can ensure the process of Islamic mortgage is undertaken smoothly whilst explaining the stages to you every step of the way.  We understand that purchasing a property is one of the most stressful and time-consuming experience a person will go through. Our firm aims to relieve our clients of the distress and pressures involved in this process by using our experience and expertise in ensuring that the transaction is completed without any delay or difficulty.”

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