Sharia-law-compliant home purchase or home finance plans exist to help Muslim homebuyers purchase a home without paying interest. They tend to be quite complicated, so it’s wise to seek specific financial advice if you are considering using this type of plan.
We’ve put together this brief explanation of Sharia-law-compliant purchase plans and a list of resources that might help you.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
How do Sharia-law-compliant plans work?
Muslims are not permitted to benefit from receiving money from someone, or from lending money, which means interest payments are not allowed. This means that interest can’t be charged on Islamic mortgages, nor is it paid on Islamic savings accounts. Eliminating interest from the homebuying process means that Sharia-compliant purchase plans work quite unconventionally. There are three main types of these plans, which involve working closely with your lender to bring the property under your own name.
Ijara
With an Ijara plan, your lender purchases the property instead of you. You move in and make monthly payments that include both rent and capital towards the actual purchase of the property. At the end of the agreed term, assuming you have kept your payments up, you will have bought out the lender’s stake in the property and taken ownership. Until this point, your share in the property remains constant.
Murabaha
In a Murabaha plan – which counts as a finance plan rather than a purchasing plan – the lender purchases the property and then sells it on to you straight away for a slightly higher price. The property will belong to you from day one this way, and you will make repayments for the remaining term of your plan (or pay it all back early with no penalty). In this way, Murabaha plans are the most similar to regular mortgages.
Diminishing Musharaka
Also known as Musharakah, this is similar to an Ijara plan, except you co-own the property from the beginning with separate stakes. As you make more monthly payments, your stake will increase and theirs will shrink, and you will have to pay less and less rent accordingly. Eventually, you will have fully bought up the lender’s stake and own the property outright.
How much do I need for a Sharia-compliant home plan?
All of these plans will usually require a deposit of at least 20% of the property.
You’ll then need to make sure you can afford to cover the monthly repayments, especially if you are going to be paying back both rent and capital, plus charges.
There are also various other costs to consider which come with any property purchase, such as surveys, conveyancer’s fees, insurance, Stamp Duty, and so on. Read our article How much does it cost to move house? for the full rundown.
Where can you get a Sharia-compliant home plan?
Sharia-compliant plans are not very common, and tend to only be offered by specialist lenders. Gatehouse Bank, Al Rayan Bank and Ahli United Bank are three major UK lenders who offer Sharia-compliant home finance and purchase plans.
Finally…
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
Have a look at our guide 11 common mistakes homebuyers make (and how to avoid them) to avoid some of the biggest house-hunting pitfalls.