What is an Islamic mortgage and how do they work?

Islam forbids interest-bearing loans, so Muslims may prefer to seek a halal alternative when purchasing a property.

There are a range of Islamic mortgage alternatives available, allowing buyers to get on the property ladder while being sharia-compliant.

What is an Islamic mortgage?

Sharia-compliant mortgages are ‘mortgage alternatives’ and function as no-interest home purchase plans.

How does an Islamic mortgage work?

Although there are several variations across the market, they all work in the same way: the bank buys the property on your behalf and becomes the legal owner.

Your monthly payments function more like rent, with a portion going towards buying out the property owner’s stake. At the end of the term, you should either have bought the property back or have an outstanding sum left to settle before you become the legal owner.

What are the different types of Islamic mortgage?

The three types of halal mortgage alternatives are:

• Ijara
• Diminishing Musharaka
• Murabaha

Ijara

With an Ijara home purchase plan, a Sharia bank buys the property and leases it to you. You make monthly payments that cover rent, capital repayments, and charges.

Your ownership share of the property remains consistent throughout the length of the term until you have paid off the bank’s stake and become the sole owner..

Diminishing Musharaka

Diminishing Musharaka is a joint purchase agreement between you and your Islamic bank.

Each payment, consisting of rent, capital, and charges, reduces the bank's share and increases your ownership stake. As your share grows, the bank’s share, and your rent, decreases over time.

Murabaha

Murabaha is not a home purchase plan but rather a home financing arrangement, where the lender purchases the property and immediately resells it to you at a higher price.

You pay an initial deposit, typically at least 20%, and the property is yours from day one. Repayments are fixed for the term of the mortgage, and you can repay the loan early without penalty.

These kinds of Halal mortgage agreements are rarely seen for UK home purchases but are sometimes used in commercial property development.

As these Islamic mortgage alternatives are all slightly different, you should take care to consider the potential risks and advantages of each, so you find the right option for you.

What are the risks of an Islamic mortgage?

Although your chosen bank is the legal owner of the property, you will still need to cover the costs of insurance, general maintenance, and conveyancing and stamp duty on the initial purchase.

You’ll need to add all of these outgoings to the costs of the purchase plan itself (though of course this warning applies with a conventional mortgage too).  

It is also worth noting that many Islamic and halal mortgage providers will use LIBOR-pegged values to set your rent, rather than using average levels in your local area as a guide.

This could work in your favour, but could potentially see you paying more than you would reasonably expect to for your location.

How much deposit do you need for an Islamic mortgage?

You will typically need a minimum of 20% deposit to qualify for a halal mortgage alternative.

You will also need to budget for surveys, building insurance, stamp duty and any other costs, such as mortgage broker fees and legal costs.

How do you get an Islamic/Sharia mortgage in the UK?

You can find sharia mortgage alternatives at many UK banks and building societies, not just those who specifically describe themselves as Islamic banks.

Among the three main types of purchase plan covered here, there are lots of individual no-interest products available, so it’s well worth shopping around for the best deal.

A halal mortgage broker specialist with experience of this type of mortgage alternative can help you choose between the many different products available.

Your broker can also assist you when it comes to remortgaging, which can be complicated with Islamic mortgages (take a look at our full guide to remortgaging for a breakdown of the conventional process).

Islamic mortgages and home purchase plans are regulated by the Financial Conduct Authority, meaning that all providers are legally required to protect your interests.

Find out more about Islamic financial products.

Get expert financial advice

Islamic mortgages offer a viable, Sharia-compliant alternative to traditional interest-bearing loans and provide various options tailored to different needs and preferences.

Whether you choose Ijara, Diminishing Musharaka, or Murabaha, each plan has its unique structure and benefits. This ensures you can find a solution that aligns with your financial and religious principles.

Unbiased can quickly match you with a qualified mortgage broker who can help you navigate the various Islamic mortgage options available and find the one that best suits your needs.