What is an Islamic mortgage?

Key takeaways

• Islamic mortgages are Home Purchase Plans (HPP) that avoid interest (riba) to remain Sharīʿah-compliant.
• The provider buys the property with you; you pay rent on their share and gradually buy them out.
• While some require 20-25% deposit, schemes like Wayhome allow for deposits as low as 5%.
• Halal certification: Reputable products are certified by bodies like the Islamic Council of Europe or Amanah Advisors.

Is a mortgage allowed in Islam?

In Islam, charging or paying interest on a loan is not allowed because it is considered exploitative of the person borrowing money. Traditional mortgages, or mortgage products like Help to Buy would therefore not be considered Sharīʿah-compliant, as they require interest to be paid on top of the money borrowed for the mortgage.

However, Muslims can still borrow money as long as it is interest-free. These interest-free options are known as Islamic mortgages, halal mortgages, or Sharīʿah-compliant mortgages.

What is an Islamic mortgage?

An Islamic mortgage, also known as a Sharīʿah or sharia-compliant mortgage or Muslim mortgage, is an alternative mortgage product that enables someone to buy a home without paying interest on a loan. These usually take the form of home purchase plans (HPP) or part buy, part rent schemes. These schemes allow Muslims to get a home of their own whilst still respecting the rules of Islam.

How does an Islamic mortgage work?

Islamic mortgages function as interest-free Home Purchase Plans (HPP) through these steps:

• Purchase: The provider buys the property and becomes the legal owner (or co-owner).
• Monthly Payments: Your payment is split into two parts:
• Rent: Paid to the provider for using their share of the home.
• Acquisition: Paid to increase your equity stake in the property.
• Full Ownership: Over time, your share grows until you own the property outright or buy the remaining stake.

At the end of the mortgage term, depending on the Islamic mortgage you go with, you’ll either own the property in its entirety or be able to buy the remaining equity from the provider, so you can become the sole owner.

Is an Islamic mortgage more expensive?

The cost of Islamic mortgages compared to standard mortgages can vary depending on several factors. Sharīʿah-compliant mortgages can sometimes require you to put down a 15-25% deposit, although you can find schemes that only require a 5% deposit, like the Gradual Homeownership scheme.

If you choose an Islamic mortgage scheme that requires a higher deposit in comparison to a regular mortgage, this can make buying a home more expensive at the start. The upside is that you will have a larger equity stake in the home to begin with.

Islamic mortgages can also be more expensive because there are fewer providers in the market. With less competition, costs tend to be higher.

Is it hard to get an Islamic mortgage?

Islamic mortgages can be harder to qualify for than standard mortgages because they may require a larger down payment, in some cases as much as 25% of the property price. But you can also find Sharīʿah-compliant mortgages, which only require a 5% house deposit. Like other mortgages, you will also need to pass affordability checks to ensure you can afford the monthly payments.

If you are self-employed or have had issues with credit in the past, you might not be eligible to qualify for certain Islamic mortgage schemes. With some Sharīʿah-compliant mortgages, you may also need to meet the minimum income requirements to qualify.

Is shared ownership halal?

While shared ownership is sometimes seen as haram, home purchase plans that function similarly are considered halal because they don't involve paying interest. Instead, a bank or private provider purchases a property on your behalf, which you then buy off them over time through instalments. Until you own the home fully, you will also pay the provider rent.