How does an Islamic Mortgage work?

An Islamic Mortgage is a method of purchasing a property which is sharia compliant and hence avoids all aspects which are forbidden within Islam such as Interest, Speculation and Uncertainty. In a conventional mortgage the bank simply provides the finance to the purchaser of the home who then agrees to pay back the sum borrowed over a period of time and in addition to this he also agrees to pay interest on the borrowed sum at the prevailing rate. In an convetional mortgage the bank has no element of ownership of the property but the amount borrowed is secured against the property. However in the case of an Islamic Mortgage the Islamic Bank enters into an agreement of shared ownership, therefore the bank and the purchaser own the respective percentage of the property based on their contribution of the cost of purchase. During the term of the agreement the borrower agrees to pay the bank rent which is based on the portion of the property the bank owns. The rent over time contributes to paying back the sum borrowed and the banks profit (which has been deferred over the term of the agreement). Over time the borrowers share in the property increases and the banks share decreases and therefore generally if the same amount is being repaid monthly then a larger percentage will go towards the repayment of the actual loan and less will go to the bank as rent. Some lenders also offer a rent only Islamic Mortgage. Here again there is shared ownership of the property based on the contribution of both parties in the purchase of the property however where during the term the lender pays rent which in essence is the banks profit and does not contribute in paying back the actual loan amount (the banks contribution in the purchase price) until then end of the term. In both of the above instances once the agreement comes to an end the full ownership is then passed from the bank to the other party.

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