Are you curious to know what is a halal mortgage or an Islamic mortgage? Or, are you looking for a list of the banks that offers this kind of mortgage in the UK? Then, read on.

What is a Halal Mortgage (Islamic Mortgage)

Islamic mortgages, also known as ‘halal mortgages‘ “Islamic home financing” or “Islamic financing,” are a type of home loan that is compliant with Islamic laws and principles. These laws and principles, known as Shariah law, prohibit the charging or paying of interest (riba), which is considered to be a form of exploitation. As a result, traditional mortgages, which involve paying interest on a loan, are not permissible under Islamic law.

To comply with these laws and principles, Islamic mortgages use alternative financial structures such as joint ownership (where the bank and the borrower jointly own the property) or leasing (where the bank purchases the property and leases it to the borrower). The borrower then makes payments to the bank, which are split into two parts: rent for the use of the property, and a contribution towards the purchase price. This contribution gradually reduces the bank’s ownership share of the property until it is fully transferred to the borrower.

Islamic mortgages also typically prohibit speculative or risky investments and encourage investment in socially responsible and productive ventures. They also often require the borrower to have a certain level of income and creditworthiness, and the property being financed must be used for a permissible purpose, such as owner-occupied housing.

What is the Difference between Halal Mortgage and a Conventional Mortgage?

The main difference between a halal mortgage and a conventional mortgage is the way in which the loan is structured and the way the interest on the loan is calculated and paid.

Conventional mortgages involve borrowing money from a lender, with the borrower agreeing to pay back the principal loan amount plus interest over a set period of time. The interest rate on a conventional mortgage is typically a fixed or variable rate, and is calculated as a percentage of the outstanding principal loan amount.

On the other hand, halal mortgages, also known as Islamic mortgages, are structured in a way that complies with Islamic laws and principles, which prohibit the charging or paying of interest (riba). Instead of paying interest on a loan, halal mortgages typically use alternative financial structures such as joint ownership or leasing to finance the purchase of a property.

In a joint ownership structure, the bank and the borrower jointly own the property, and the borrower makes payments to the bank, which are split into two parts: rent for the use of the property, and a contribution towards the purchase price. This contribution gradually reduces the bank’s ownership share of the property until it is fully transferred to the borrower.

In a leasing structure, the bank purchases the property and then leases it to the borrower for an agreed-upon period of time. The borrower makes payments to the bank, which are made up of rent for the use of the property and a proportion of the purchase price of the property. At the end of the leasing period, the borrower has the option to purchase the property at a pre-agreed price.

In both cases, the bank and the borrower share the risk of the property’s value, and the profit or loss is also shared, based on the agreed sharing ratio, that comply with the shariah law.

It’s worth noting that while halal mortgages are designed to comply with Islamic laws and principles, they are not available in all countries and their availability and terms may vary widely.

Types of Islamic Mortgages Available in the UK

In the UK, there are several types of Islamic mortgages that are available, including the Diminishing Musharaka, Ijara, and Murabaha structures.

The Diminishing Musharaka structure is the most common in the UK and is often used in home purchase plans (HPPs). Under this structure, the purchaser and Islamic bank jointly purchase the property and the purchaser gradually buys back the property from the bank by paying rent on the bank’s portion. A deposit is required at the time of purchase, with a minimum of 5% required, but ideally 20% to avoid paying high rental fees.

The Ijara structure is similar to the Diminishing Musharaka, but there is no “diminishing” of the bank’s portion of the property. The purchaser pays monthly rent on the bank’s portion of the property but does not make any payments towards buying the bank’s portion. This type of mortgage is typically not advisable for a home purchase where the purchaser plans to live, as it can result in having to sell the property at the end of the term to pay back the bank. It is often seen in a buy-to-let context where monthly cash flow is the main concern.

Under the Murabaha structure, the Islamic bank purchases the property on behalf of the purchaser and then sells the same property at a marked-up price. This type of structure is sometimes seen in a buy-to-let scenario, commercial property development financing and bridge financing situations in the UK. It is more common in the Middle East and Far East and may not be permissible for some Muslim scholars in UK. It is important to note that commodity Murabaha is another type of this structure that have compliance concern and is not recommended.

 

List of Banks in UK that Offers Halal Mortgage

According to our research, this is the list of the banks in UK that offers Halal Mortgage.

It is important to consult with a sharia advisor or Islamic bank to understand the terms, conditions, and compliance with the shariah of the structure that suits your needs.

  • Al Ahli
  • Gatehouse
  • Heylo Housing
  • Wayhome
  • Crowdtolive
  • Primary Finance
  • UBL
  • Habib Bank

Final Thoughts

The Islamic mortgage industry is expected to experience significant growth in the near future, leading to improvements in customer service, pricing, and accessibility. This is a positive development that will benefit customers. Furthermore, our examination and evaluation of the Shariah compliance of the products offered by different Islamic banks aims to drive the market towards offerings that not only adhere to Islamic laws and principles in form, but also in spirit.

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