The mortgage market has evolved over a number of years and adapted to cater for the demanding requirements of peoples needs. Special types of mortgages have been designed such as islamic mortgages to help muslims in the UK to become homeowners.
Why create Islamic mortgages?
According to Islamic law also known as Sharia law, it is forbidden for muslims to pay or receive interest. As all traditional mortgages adopt an interest bearing mechanism majority of Muslims cannot take out a mortgage. Many years ago the market could not offer a purpose and tailored mortgage offering to muslims therefore many people were forced to either live in rented accommodation until they had managed to save enough money to make outright home purchases. Alternatively, some muslims had no choice but to take the only conventional mortgage offer and go against the Sharia law.
How many types of Islamic Mortgages are there?
The two key types of Islamic mortgages that are available are Ijara and Murabaha mortgages. Both mortgage types meet the Sharia law requirements as no interest rates are charged to the borrower. The lender implements other means to ensure they make the required profit.
The Ijara mortgage allows the borrower to lease the property with the aim to own the property at the end of the repayment period. Murabaha mortgages differ in that the mortgage lender resells the property to you at a higher cost.
How does an Ijara mortgage work?
An Ijara mortgage type is divided into 2 components. The first part is the amount of mortgage you take out with the lender once you have agreed a selling price with the current property owner. The second part is the lease or rental agreement of the property. The amount you can normally borrow under an Ijara mortgage is usually equivalent to 90 per cent of the property value.
With these two components you will make a fixed monthly payment to cover the loan amount you require and pay a rental fee that is agreed with your loan provider. The actually fee is set on an annual basis and reduces in line with the term of the agreement. The rental fee allows the mortgage lender to make their income similar to how they would with an interest backed mortgage.
Ijara mortgages are normally spread over 25 year term and upon completion of this the property is transferred into your ownership.
How does an Murabaha mortgage
With a Murabaha mortgage the mortgage lender will immediately purchase the property in question at the agreed price. The lender will then re-sell this property to you at a higher price. This allows the lender to create their profit on the mortgage deal. A Murabaha mortgage will require you provide a 20 per cent deposit and then provide you with a payment plan usually spread over a 15 year window.
Which Islamic mortgage should I take out?
Ijara mortgages are probably the most popular type of Islamic mortgages that are offered as they are seen as more flexible; they require the least amount of capital upfront and can be spread over a longer repayment plan than a Murabaha mortgage. You should only really consider a Murabaha mortgage if you have quite a large sum of capital as a 20 per cent deposit of the purchase price is usually required. It is also important to realise that with a Murabaha mortgage the maximum repayment term is likely to be 15 years therefore even after your 20 per cent deposit you could be looking at quite high monthly repayments.
Where can I get an Islamic Mortgage?
Like with other mortgages it is always best to check out the market, many high street providers such as HSBC and Lloyds TSB offer Islamic mortgages. You can also complete our mortage enquiry form below and we will put you in touch with FSA regulated mortgage brokers who will happily deal with your enquiry.