Islamic mortgages case study

Market research suggests there is a potentially huge market for Islamic mortgages in the UK – but how do they benefit Muslims trying to buy a home?

Waseem and Saima Taj want to buy their own home but it is proving difficult: They can’t get a mortgage which complies with their faith.

The young couple married in March this year and are embarking on their careers. They live in west London with Mr Taj’s parents.

The monthly payments will be more but that’s not the issue … We will have the satisfaction of knowing the mortgage is halal

Waseem Taj

Their hopes of getting their own place are being delayed by the high price of London property and, more importantly, the lack of mortgages in the UK which comply with Islamic law.

“We’re living with my parents at the moment because we’re trying to save enough money for a house,” says Mr Taj.

“Ideally we want a two-bedroom house near to where we live. We have thought about moving out of London but don’t really want to because all our family are here.”

Mr Taj, who works in the IT industry, began looking into buying a home during his studies.

“When I learned how mortgages work and that you have to pay interest, I spoke to Islamic scholars for advice.

“I decided mortgages based on interest would not be acceptable to me because they would compromise Muslim principles.”

Mortgages from British financial institutions are interest-based, something which does not comply with Islamic Sharia law.

Islam has no objection to wealth creation, but says it must be based on partnerships and fairness where risks and rewards are shared.

In the eyes of Islamic scholars, interest is an excess payment from one party to another which is unrelated to the value of the goods traded.

Mortgage interest is therefore unacceptable because one party gains at the other’s expense without any regard to the price paid for the home.

This means many Muslims in Britain find themselves in a difficult situation, trying to balance the core principles of Islamic equality with the realities of the British mortgage market.

In many cases Muslims conclude they have no choice but to reluctantly take out an interest mortgage – something Mr Taj’s own parents did.

But Mr and Mrs Taj are among a growing number of young couples who want to turn to the two lenders in the UK offering Sharia compliant mortgages – the United Bank of Kuwait and the West Bromwich Building Society.

Open in new window : Islamic mortgages
An example of how they compare

Once the Tajs find a house, the lender buys on their behalf and owns it outright.

It would make a real difference if there were more products on the market … then there would be more choice for Muslims

Waseem Taj

Just as with an interest mortgage, the couple move in and begin paying instalments to the lender to slowly buy the home over many years.

But the difference is they also pay a rent to the lender who has effectively become their landlord.

The lender owns the property and receives a rent until the Tajs pay the final instalment.

In Islamic terms, the rent is not another name for interest: It is seen as a fair payment for use of the property rather than a charge for borrowing money.

There are a number of factors which make this more expensive than an interest mortgage. Firstly, the couple need a large deposit of 20% of the value of the home.

Secondly, because the process means the home legally changes hands twice, the Tajs will end up paying stamp duty twice, rather than once.

The couple have an added worry of trying to save enough to keep up with the rising London property market.

Prepared to pay more

“I don’t mind paying a lot more for our home through an Islamic mortgage,” says Mr Taj.

“The monthly payments will be more but that’s not the issue. The issue is we will have the satisfaction of knowing the mortgage is halal [permitted]. We’re prepared to accept the costs.”

So is there a demand for this type of mortgage?

“There’s enormous interest in this subject among young Muslims. A lot of our friends are in the same situation,” says Mr Taj.

“Some have managed to raise the money to take out an Islamic mortgage.

“A few of them have taken out interest mortgages because they feel it is the only choice they have, given the costs.

“I think they feel guilty about it but believed they had no alternative.

“It would make a real difference if there were more products on the market. Then there would be more choice for Muslims.”

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