It is against Islamic law to receive or pay interest, which has traditionally been a big problem for Muslims living in the UK, as it meant that only the very wealthy were able to buy homes because they had the ability to purchase properties outright.
Luckily for British Muslims, banks are gradually recognising that this is a problem for a large number of people, and are therefore offering an alternative, by way of Islamic Mortgages and other forms of finance tailored towards Muslims.
Halal mortgages currently come in two forms, the Murabuha and the Ijara.
The Murabaha Mortgage
The Murabaha form of mortgage is only a viable option for those with a vast amount of capital and wealth behind them. This is because one of the main conditions of this mortgage package is that you are expected to pay approximately 20 per cent of your home’s value, on the day of purchase. However, as soon as this deposit has been paid, the house is registered to the new owner. After this initial payment, you can pay off the remaining balance at any point. One of the things that this package offers is a fixed repayment period agreed between borrower and a lender, and a monthly repayment amount that is fixed for the term of the mortgage.
When a prospective buyer finds a home that they would like to purchase, they will arrange a sale price with the vendor as normal, however in this mortgage, the bank will pay this arranged purchase price. Immediately after the purchase of the property, the bank sells the house to you at a higher price.
This higher price is determined by the original price of the property, and the repayment period that you will have agreed with the lender, minus the percentage you pay as deposit.
The Ijara Mortgage
The Ijara mortgage option is a slightly more popular option, as it does not require such a large amount of capital behind you to set up this mortgage. It is also slightly more flexible than the Murabaha mortgage. The Ijara also has the added advantage of being an option for those looking to replace a pre-existing interest based mortgages. The amount you pay each month is usually fixed annually, and the outstanding balance can be paid off at any time without incurring any penalties.
As with the Murabaha mortgage, a buyer will find a property that they wish to buy, and agree a purchase price with the vendor. At this point the difference between the two mortgage types appears, the primary difference is that your lender will then purchase, and gain ownership of the property. You will enter into a lease agreement with the lender, and each month you will be expected to pay rent to your lender and a contribution towards the purchase of your property.