7.6.2023

Sharia-Compliant Mortgages: Everything You Need To Know

Most house buyers in the UK take out a mortgage to pay for their home. Mortgages involve borrowing money from a bank or lender to buy the house, then paying this money back over a set period of time.

Standard mortgages involve paying interest (riba) on the money you borrow. But riba is haram in Islam, so interest-based mortgages may not be the right choice for lots of would-be Muslim homeowners.

Luckily, more UK banks are starting to offer Sharia-compliant mortgages. Muslims living in the UK now have more options to find a mortgage that works with their faith.

In this article, you’ll learn:

How Sharia-compliant mortgages work
The difference between ijarah, murabaha, and musharakah mortgages
Which UK banks offer Sharia-compliant mortgages.

What is a Sharia-compliant mortgage?

A Sharia-compliant mortgage, also known as an Islamic mortgage, is a type of home financing that adheres to UK Islamic finance principles.

Islam forbids Muslims from charging or earning interest, as well as investing in haram products and activities (like alcohol and gambling). Sharia-compliant mortgages are designed to enable Muslims to buy a home affordably without paying riba or indirectly making such investments.

How does an Islamic mortgage work?

There are three main types of Islamic mortgage, each of which works in a slightly different way. These are:

Murabaha
Ijarah
Musharakah

Murabaha

With murabaha mortgages, the bank buys the property from the seller, then sells it on to the buyer at a higher price. The buyer pays a deposit (often around 20%) then pays back the remainder in instalments. This enables the bank to turn a profit without charging interest.

Ijarah

With ijarah mortgages, you’ll also make monthly payments to the bank. But instead of buying the property at a higher sales price, these payments are used to pay off three elements of the mortgage:

Rent — the amount you pay to live in the property
Capital — the amount you pay to buy the property
Charges — bank fees (this differs from interest as it’s fixed, and won’t fluctuate with the market).

When you come to the end of your payment plan, ownership of the property will transfer to you.

Musharakah

A musharakah agreement means you and the bank jointly own the property. Like in an ijarah agreement, you pay both rent and capital each month.

The more you pay in, the more your stake in the property grows. As your stake grows, you owe less to the bank, and you won’t have to pay them as much rent. That means the amount you owe each month usually decreases under a musharakah agreement.

Do you have to pay a deposit with a Sharia-compliant mortgage

Yes. No matter which type of Islamic mortgage you choose, you’ll need to pay an upfront downpayment on the property. The exact deposit percentage depends on the requirements of your mortgage provider, but it can be as little as 5%.

Other costs in an Islamic mortgage

In addition to paying off your mortgage, you also need to think about the other costs of buying a home. Even though you may not technically own the home (especially if you have an ijarah or musharakah agreement), you’re still responsible for these costs:

Buildings and home insurance
Stamp duty
House surveys
Legal costs
Valuation fees.

These don’t typically incur riba or involve investments, so you don’t need a specific Sharia-compliant service to arrange payment for these. However, it may be helpful to use a solicitor and other service providers who are familiar with the Islamic mortgage process.

What are the risks of using a Sharia-compliant mortgage?

Even if you have a joint ownership agreement with your bank, their terms are likely to state that you’re responsible for paying back your instalments on time.

If you can’t keep up with your repayments, you might be subject to penalty fees and even repossession of your home. So even though you won’t owe interest, it’s still important to make sure you can afford your agreed mortgage repayments.

Which UK banks offer an Islamic mortgage?

Several UK banks now offer Sharia-compliant mortgages, including:

Gatehouse Bank
Ahli United Bank
Al Rayan Bank (commercial property only)

There are also several other Islamic home financing schemes available online, such as Heylo Housing, WayHome, and StrideUp. Many of these are endorsed by Islamic scholars and groups.

If you choose an online scheme, make sure it’s covered by the FCA and the Financial Services Compensation Scheme (FSCS). If it’s not, you could lose any money you’ve paid in — as well as your home — if the scheme goes bankrupt.

Do Islamic mortgage lenders do credit checks?

Yes. Sharia-compliant mortgage lenders still want to make sure you can afford to pay your mortgage each month. So they’ll usually check your credit report and UK credit score.

Find out if you need a credit score in the UK to learn more.

How can I be sure my mortgage is Sharia-compliant?

Most banks that offer Islamic mortgages have a certificate of Sharia compliance. This is usually issued by an established Islamic authority, such as the Islamic Council of Europe.

However, if you're not sure, or you want some individual guidance, seek the advice of a qualified Islamic finance expert you trust.