Islamic Mortgages
Islamic banking adheres to the principles of Islamic law - known as Sharia law.
Unlike western financial practice, Sharia prohibits the payment or acceptance of interest or other fees (known as Riba or usury) in exchange for money loans.
In addition, financial institutions following Sharia law will not invest in goods or services considered contrary to Islamic principles (examples include the alcohol and gambling industries).
How do Islamic mortgages work?
When someone takes out a mainstream UK mortgage, there will be a rate of interest (either variable or fixed) attached to that deal.
Because Sharia principles prohibit the payment or acceptance of interest in this way, Islamic mortgages operate on a different basis.
Usually, the bank will purchase the property in question - and then re-sell it to the buyer at a higher price.
The buyer is then required to pay the bank for the property, in instalments.
Because the charging of penalties and fees is also against Sharia principles, the bank needs another way to protect itself against the possibility of the buyer defaulting on his or her repayments.
The bank usually does this by asking the buyer for strict collateral, in the form of a substantial lump sum deposit. For example, the buyer may initially contribute 40% of the property's purchase price, and the bank 60%.
Over a set period of time, the buyer will then make further monthly repayments to the bank. With each repayment, the buyer's share in the property increases, and the bank's share decreases.
Where can I get an Islamic mortgage?
There are now several banks in the UK that offer Islamic mortgages. Some (like the Islamic Bank of Britain) specialise in Sharia-compliant services, while others (like HSBC) are mainstream UK banks with arms dedicated to Islamic products.
Are they only available to Muslims?
No. Most banks offering Islamic mortgages are happy for Muslims and non-Muslims to apply for them.
