What is a Sharia mortgage?

It is important to note that banks operating under Islamic financial principles don’t provide ‘mortgages’. This type of financial product is not permitted in Islam due to the paying of interest, which is against sharia law. Instead, Muslim banks offer home purchase products called ‘home finance’, ‘home purchase plans’ or similar titles.

These sharia-compliant products provide alternatives to interest-based borrowing, lending and saving services provided by non-Islamic banks. Islamic banking is not restricted to Muslims only – it is perfectly permissible for non-Muslims to take out sharia-compliant products. In fact, these halal (or ‘permitted’) products can be desirable to anyone to whom ethical banking is an important consideration.

As outlined above, the charging of interest (or ‘riba’, as it is called) is strictly banned under Islamic law. However, Islam has no problems with wealth or income, just so long as it is based on partnerships, trade and the fairness of sharing risk and reward. Islamic banks cannot deal with any businesses involved in alcohol, pork, gambling, pornography, speculation, tobacco, those that deal in interest or other any other commodities that are forbidden (or ‘haram’) under Islamic law.

Considering the above, banks operating under Islamic principles will deal in an ‘expected profit rate’, rather than interest rates. You’ll find these quoted in all cases where mainstream UK banks would normally use interest rates.

Islamic banks will always have a sharia-compliance officer and/or a panel of Islamic scholars who are familiar with sharia banking principles. It is their responsibility to ensure that all transactions and financial products are in line with Islamic principles and law.

The main difference between a typical mortgage and a halal HPP is that there is no lending or borrowing of money. Instead, the Islamic bank will purchase the property on the customer’s behalf then lease (or rent) it back to them. Rather than repaying the bank as in a mortgage, the customer now pays rent to the bank who has, effectively, become their landlord. However, once the final instalment is paid, the property then belongs to the customer. In this example, ‘rent’ is not simply another word for interest but rather a fair payment for the use of the property.

It should be noted that Islamic banks will often require a larger deposit than a mainstream UK bank or building society. Rather than the 5% or 10% often paid by first-time buyers, HPP agreements require around a 20% deposit. In addition, other factors can make HPPs slightly more expensive than a traditional mortgage.

Since 2002, UK law has stated that stamp duty is only payable on sharia HPPs once at the outset. Previous to this, stamp duty had to be paid twice – once when the house was purchased by the bank and again at the end when the property would be transferred to the customer’s name.

When buying a house through a bank using Islamic financial principles, you will still need to also pay for:

• All surveys or searches of the land register
• Buildings and contents insurance (the latter is not compulsory but is strongly recommended)
• Valuation fees
• Legal and/or solicitors fees – note that you will not only need to pay for your own solicitors but also another to represent the lender.

There are now several banks and financial institutions that operate under Islamic principles and offer a range of products and services. All these sharia-compliant banks are registered with the UK regulator, the Financial Conduct Authority, meaning that they offer their customers the same level of protection as a mainstream lender under the Financial Services Compensation Scheme.

In addition, a number of the larger high street banks also offer ‘Islamic windows’, which provide similar services based on Islamic principles.

Interestingly, Islamic banks are becoming more and more popular among non-Muslim customers as they become better known. In line with other ‘challenger banks’, they often pay better returns on savings-based products than the more well-known brands.

Below is a selection of UK banks that operate under Islamic principles and offer sharia-compliant HPPs. Please note this list is for information purposes only:

• Ahli United Bank
• Al Rayan Bank
• Bank ABC
• Gatehouse Bank
• Primary Finance
• Qatar Islamic Bank
• United National Bank (UK)