Islamic Mortgages v Conventional Mortgages

What are the key differences between a Shariah Compliant Mortgage and a Conventional Mortgage?

The underlying principle of shariah finance is that money cannot be generated from money i.e. interest . Some form of transaction has to take place between the vendor and the buyer. In the resultant transaction if a profit is made this is acceptable.

In addition to this ownership has to pass from the vendor and seller. In a conventional mortgage the bank merely facilitates the financing of the home and charges interest for this, a separate transaction  occurs for the sale and purchase of the house between the vendor and the buyer. In the Shariah home finance model regardless of which type of instrument we are considering the bank at some point owns the property and at some point passes the ownership to the person who has taken out a mortgage with them. In general the schemes currently offered by the various shariah banks fall in to one of the two following categories.

a)      The bank passes on the ownership at the end of the term of the agreement and purchaser will pay a lump sum at the end to take ownership after having paid rent during the term.

b)      Alternatively ownership will be passed on after the purchaser has agreed to pay for the property on a deferred basis over the term agreed upon, the repayments will cover the original cost of the property and the profit or rent which has been pre agreed.

The key differences mentioned above distinguish these mortgages from the conventional interest bearing mortgages. Furthermore these mortgages have been deemed acceptable and they have been approved by leading Islamic scholars in Islamic finance. Any of the shariah banks we work with will be glad to provide you with the details of their shariah compliance upon request.

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