How to Get an Interest Free Mortgage in 2023
Did you know that you can get an interest free mortgage in the UK?
They're not as easy to come by as regular mortgages, but if you're on the hunt for a more affordable or halal route to homeownership, then keep reading.
Here’s everything you need to know about interest free mortgages, from how they work to how you can get one (even if you’re a first-time buyer!).
Feel free to jump around:
- What is an interest free mortgage?
- How to find an interest free mortgage lender in the UK
- Banks that offer interest free mortgages
- The disadvantages of an interest free mortgage
- An interest and debt-free mortgage alternative
- Interest free mortgage FAQs
What is an interest free mortgage?
An interest free mortgage is a type of mortgage where you don't have to pay interest on the money you borrow. Instead of charging interest, the lender usually takes a share of the property's equity, which you gradually buy back over time.
With an interest free mortgage, your monthly payments may be lower than they would be with a traditional mortgage as you won't have to pay the extra cost of interest fees. They’re still a relatively new concept in the UK, but they’re becoming more popular as an alternative way to buy a home.
How to find an interest free mortgage lender in the UK
The best way to find an interest free mortgage lender is to search for “Islamic mortgages” instead. Earning or paying interest is not allowed under Islamic law, so the UK's Islamic community generally only uses interest free methods to buy homes
That means any Islamic mortgage or home purchase plan (HPP) on the market will be interest free and, even if you’re not a member of the Muslim community, you may still qualify for one.
However, not many banks in the UK offer Islamic mortgages, so it’s important to know where to look.
Banks that offer interest free mortgages
Right now, there are a few provides of interest free home purchase plans:
- Ahli United Bank
- Al Rayan
- Gatehouse
Al Rayan and Gatehouse used to be the two biggest names in the market, but both have stopped offering their Islamic HPP products at different points recently. So, the number of banks offering interest free mortgages can be limited.
Due to the decline in the number of banks offering these kinds of mortgages, many people who’d prefer to buy a home without paying any interest are turning to mortgage alternatives instead. Luckily, there are some great new options on the market!
Feel free to skip to the bit about interest free mortgage alternatives to learn more.
The disadvantages of an interest free mortgage
You’d have thought there wouldn’t be any downsides to paying no interest whatsoever on your mortgage, right? Well, like any financial product, interest free mortgages have their own set of disadvantages. Here‘s a list of potential cons to bare in mind:
- Higher upfront costs
Interest free mortgages typically require higher upfront costs than traditional mortgages because they involve additional administrative fees and charges, like the cost of setting up the Islamic finance structure.
- Limited options
There’s not as much variety when it comes to interest free mortgages. Generally speaking, you’ll have fewer options to choose from compared to traditional mortgages, which could make it difficult for you to find a product that meets your specific needs.
- Bigger minimum deposit
To qualify for an interest free mortgage, you’ll generally need a bigger deposit. Sometimes it can be as high as 25 or 30%, which might not work for first-time buyers.
Of course, each individual interest free or Islamic mortgage will have its own terms and conditions. So, we’d always recommend doing your own research or speaking with a financial advisor to find out if an Islamic mortgage is the right choice for you.
An interest and debt-free mortgage alternative
Well, we couldn’t write a blog about interest free mortgages without giving Wayhome a shout-out!
We created Gradual Homeownership, an interest and debt-free mortgage alternative to help people with a minimum 5% deposit buy homes worth up to 10 times their income on the open market.
It’s also certified as Shariah-compliant as we operate under the Islamic structures of Diminishing Musharaka and Ijarah.
Here’s a rundown of how Gradual Homeownership works
We arrange a partnership between you and our funding partners to buy a property. For example, if you buy 5%, they buy the other 95%. There’s no interest as you haven’t borrowed any money, or taken on any debt.
Then, you pay rent on the part you don’t buy which goes to the funding partners who helped you purchase the home upfront. You can buy more of your home every month from just £50 (or in lump sums, if you’d prefer) and when you buy more, your rent goes down.
Gradually buy more of the home over time, all the way to 40%. Then, when you’re ready, buy out the funding partners—maybe with an interest free mortgage or with help from your family.
You can create your Wayhome account here.
Interest free mortgage FAQs
Can I get an interest free mortgage?
Yes! It’s possible to get an interest free mortgage, also known as a Sharia-compliant or Islamic mortgage. However, these types of mortgages are typically quite hard to come by and are generally only available to people who meet certain financial criteria (like access to a 20% deposit).
How can I get an interest free mortgage?
To get an interest free mortgage, you’ll need to find a lender that offers Sharia-compliant mortgages. These lenders operate under different rules and principles compared to traditional lenders, so it's important to do your research and understand the terms and conditions of the mortgage before applying. You’ll also need to meet the lender's eligibility criteria.
Or, you can go with an interest free alternative like us.
How does an interest free mortgage work?
With an interest free mortgage, the lender doesn’t charge interest on the money they lend you. Instead, they make money by taking a share of the ownership of the property, which you gradually buy back from them over time through regular payments.
This is known as a "co-ownership" or a "partnership" agreement. The lender's share of the property is often gradually reduced through a process known as "Diminishing Musharaka" until you own the property outright.
