The Types of Islamic Mortgages available in the UK

Islamic banks in the UK have the same purpose of making money by lending out capital as any other banks, but because Sharia law prohibits them from directly lending money at interest, special kinds of mortgages – Islamic mortgages – have appeared. These rely on basic techniques such as the sharing of profit and loss between bank and customer to avoid the restrictions imposed by Islam.

Islamic banks have devised, and continue to devise, techniques that allow them to offer mortgages to Muslims without breaking the Sharia law. Here’s a summary of the main types of Muslim mortgages currently available in the UK & at comparethefinancialmarkets.com

Murabahah

A bank, instead of lending a buyer the money necessary for them to purchase a home, buys the home itself and then resells it to the buyer at a higher price. The buyer can pay the money to the bank in instalments, over a predetermined period of time. With Murabahah the bank exposes itself to many risks; to compensate for this it requires a rigorous collateral control. Normally, with this type of mortgage no extra fees are taken when the customer pays an instalment later than the set deadline.

Ijara wa Iqtina

This concept is much like real estate leasing. The bank purchases the home for the buyer and resells it at a higher price. The buyer then pays instalments until the whole value of the property is covered. To protect itself from default, the bank retains possession of the property until the buyer pays the loan in full.

Musharaka al-Mutanaqisa

This approach to Muslim mortgages is rather new and available at only a restricted number of banks. It involves the bank and borrower becoming partners and jointly providing the capital necessary for the purchase of the property. The bank afterwards rents the property to the borrower, charging an adequate rent. The borrower then purchases the share that the bank has in the property by paying regular instalments. The partnerships are dissolved after the last instalment is paid.

 

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