Why can't Muslims get a mortgage?

Buying a house for you and your family is one of, if not the biggest, investments you'll make in your lifetime.

With such a diverse population in the UK, we've seen mortgage lenders create a diverse range of home purchase plans to support those wanting to buy a house with the money available to them. It's important that those who have particular religious beliefs don't have to compromise those principles in order to get on the housing market and leave the rental payments behind.

For those in the Islamic community, there's now a range Islamic banks who offer mortgages and ownership that are compliant with Sharia law.

Before these Islamic mortgages, it was difficult for the Muslim community to get on the property ladder using a conventional mortgage. Instead, money was spent on rental payments, with many feeling as though they weren't getting value for money. Here, we're taking a closer look at the reasons why.

Remember, whether you're entering into a conventional mortgage or an Islamic mortgage, failure to keep up with your mortgage repayments could result in your home being repossessed.

If you have questions, there are plenty of free resources out there to help you make the best decision for you and your family.

Alternatively, you can consult with a mortgage advisor who will be able to compare all the available products and advise you on the best course of action for your current financial situation.

What are the differences between a conventional mortgage and an islamic mortgage?

The main difference between a conventional mortgage and an Islamic mortgage comes down to the matter of interest and whether the bank is making profit from the loan and getting value from their investment.

Non-muslims can enter into a deal with the bank whereby they will make monthly payments with interest throughout their mortgage term.

For the Muslim community, in order to honour their beliefs, it's important to find alternatives to what the bank can offer.

For Muslims, the halal and Sharia compliant way to buy a house means finding a way to access a loan that doesn't require paying interest. Thankfully, Islamic banking helps to overcome these financial challenges in a Sharia friendly way.

Why does having to pay interest act as a barrier to the market?

Riba isn't Sharia compliant

Whether you're the house buyer or a lending bank, earning or paying interest (otherwise known as riba) is considered haram (not allowed under Islamic law).

The Islamic faith doesn't believe that banks should be able to profit on someone's need for a loan to help purchase assets. Buying a house isn't about making money and earning a profit. Attitudes towards finance in Islam are much more based in community.

The word “Riba” means excess, increase or addition, which correctly interpreted according to Shariah terminology, implies any excess compensation without due consideration (consideration does not include time value of money).

For this reason, many Muslims actually choose to use their money to rent for much longer, as they struggle to find compliant mortgages and don't believe owning a house is a necessity. (There are arguments for and against this among scholars, but more on that later.)

Most Muslims who want to buy property must therefore rely on Islamic mortgages to buy their home. And to do that, they'll need to find the right bank and an interest free product.

These Sharia compliant mortgages allow buyers to purchase their property in partnership with the bank. These are often referred to as a 'home purchase plan' or 'HPPs'.

Islamic mortgages that are considered halal

There are a number of ways you can get the home you want in a halal way and different to traditional banking.

A home purchase plan can be one of three types: Ijara, Musharaka or Murabaha. These make it more possible to get the property you want while following Islam.

If you're ever in doubt about whether a mortgage follows Sharia law, there are a number of scholars and authority figures within Islamic law that have authorised  home ownership agreement products.

You can always ask your lender for more information if you need to.

Ijara

With an Ijara agreement, the islamic bank will purchase the property and lend it to the homeowner on a fixed term. Similarly to renting, you'll make fixed monthly payments.

When the fixed term is complete, the ownership of the property will be transferred over.

Musharaka

In a diminishing musharaka agreement, both the home buyer and the islamic bank buys a share of the property. This system is one of the most common agreements in the UK.

Let's say in this example, Al Rayan (the Islamic bank of Britain) has an 80% stake in the house. The main difference between this Islamic mortgage and a conventional mortgage is that instead of an £80k debt, the bank buys 80% and holds that amount on their accounts.

When you pay back the bank (payments are usually made up of part capital and part rent), the percentage of property owned increases. The share of the bank on the other hand, decreases.

As you continue making payments, your rent will reduce. At the end of the agreement, you'll have bought the bank's share in the property.

Murabaha

Murahaba agreements consist of the islamic banks buying the property on behalf of the buyer. They will purchase the property for a higher cost and sell it back to you over time.

Financial challenges

A common criticism of Islamic mortgages is that they tend to be much more expensive than a conventional mortgage. Mainstream banks often come out anywhere between 25% and 30% cheaper than Islamic banks when it comes to mortgages.

Islamic mortgages require the home buyer to put down a larger deposit amount when purchasing the home and monthly repayments are likely to be more money than the average. Many members of the Muslim community feel that rent would actually be cheaper. When weighing up your finance, these are the things you need to think about.

Where a number of conventional mortgage providers are now offering 5% or even 0% deposit schemes, many Islamic mortgages require a minimum of 20% to be put down in the first instance.

In some cases, the required deposit may even be in the region of 60%.

For many Muslims (particularly first time buyers), this can put getting a mortgage completely out of reach. The initial price is simply fixed too high and they aren't able to rent and save the money required for the large deposit.

It can be a big barrier for many Muslims accessing home purchase plans like Help to Buy or Shared Ownership.

When you compare to a conventional mortgage, it's easy to see how many people in the community have to stay in rental properties longer than they maybe would like.

Lack of access to an Islamic mortgage

While some banks have dabbled in Islamic mortgages, there are a number of high street banks where accessing an Islamic mortgage and other services isn't currently possible. Where a bank may have offered these products previously, many have stopped in recent years.

Currently, HSBC, Lloyds and Al Buraq finance are known to not be offering Islamic mortgages.

Most Muslims looking for a Sharia compliant mortgage will turn to Al Rayan Bank. The oldest and largest Islamic bank (Al Rayan Bank is sometimes known as the Islamic bank of Britain), they have the widest range of Islamic mortgage products out there and are one of the biggest players in Islamic finance.

An Al Rayan home purchase plan is the go to for many Muslims in the UK.

Potential hidden costs and concerns about insurance

Whether you're Muslim or non-muslim, you should always think about your affordability before you enter into a home purchase plan.

If the news stories of the past year have taught us anything, it's that you never know when life is going to throw unexpected curveballs at you.

One of the potential disadvantages of entering into a diminishing musharaka (for example) is that despite you and the Islamic bank sharing ownership of the property, you won't necessarily share the cost of things considered an additional necessity.

You'll be responsible for covering the cost of things such as home insurance, any cost associated with leasehold properties and general maintenance.

Islamic Insurance

If you have concerns about insurance, Islamic insurance (takaful insurance) is a way to protect your valuables while still honouring your beliefs.

'Takaful is a type of Islamic insurance wherein members contribute money into a pool system to guarantee each other against loss or damage. Takaful-branded insurance is based on sharia or Islamic religious law, which explains how individuals are responsible to cooperate and protect one another. Takaful policies cover health, life, and general insurance needs.'

The debate between conventional mortgages and Islamic mortgages

Within the Muslim community, there are debates over whether a conventional mortgage is actually haram and whether an Islamic mortgage is truly halal.

There are plenty of resources, information in the news and helpful guides to help you compare and contrast these ideas.

Is buying a house a necessity?

There are many thresholds in Islam over what is is considered a 'necessity'. Those who feel it is within reason to take out a conventional mortgage argue that owning a house is a necessity. This is usually because they feel they could have a better quality of a life for themselves and their family if they no longer have to rent.

There are a small number of scholars who believe that typical mortgages don't constitute riba in the traditional sense. Shaykh Atabek Shukurov argues that banks aren't giving out money to spend on whatever you like. They provide the loan to buy a particular property with you acting as their agent essentially.

Sh. Atabek argues that this arrangement is murabaha and therefore is compliant with Islamic law.

Why is this argument controversial?

Critics of Sh. Atabek's point of view is that they believe the bank isn't appointing a person to buy a house on their behalf.

The banks themselves don't particularly care about the property - they just need to ensure there's enough value in the asset to create good enough security against the loan.

Critics argue that an accountant would categorise a mortgage as a debt, and therefore haram. The property itself wouldn't actually play any part in a balance sheet.

The discussion here is about whether categorising traditional mortgages as halal could open up wider allowances across mainstream commercial finance agreements.

How Wayhome is helping the Muslim community access the market through shared ownership

We believe everyone should be able to access the property you want. That's why we've implemented an Islamic mortgage alternative similar to diminishing musharaka. We've worked hard in collaboration with Mufti Faraz Adam of Amanah Advisors to ensure our Islamic mortgages are completely Sharia compliant.

With the Wayhome home purchase plans, you'll be able to buy your home with a 5% deposit and no interest, no mortgage, no debt and no fees - keeping everything halal.

Instead, we'll form a partnership with you to buy your home for cash. You pay 5%, we pay 95%. Simple.  From there, you'll part buy, part pay rent on the part you don't own. The more you buy, the less your rent will be. Over time, you'll buy bigger shares in the home until you own it 100%.

There are ways you can purchase property and still respect your beliefs.

How do I know if I'm eligible for this Islamic mortgage?

We've tried to make things as simple as possible while still keeping everything halal. You'll need to produce a 5% deposit and we'll do the rest.

The only other criteria is your household income must be a minimum of £24,000 a year.

How will I know this Islamic mortgage is definitely Sharia compliant?

We work closely with Amanah Advisors to ensure our services remain compliant with Islamic law.

If we intend to change our products, they must go through a thorough audit with Amanah Advisors before we announce the news to our customers.

Will I need to get insurance like I do on a home purchase plan?

There are a number of Islamic mortgages that require you to take out comprehensive insurance as an added security measure.

At Wayhome, we want to protect your purchase, but ourselves too. We (Wayhome) take out an insurance policy that covers both parties. But as we're the ones taking out the policy, we'll be the ones paying the premiums to the insurers. You'll simply add on the price of what we call 'home support costs' to your monthly payments. For example, if the price of your home support costs is £4.50

We'll never insist you take out contents insurances or any other insurance. But it's always a good idea to explore your options and protect your valuable items whilst honouring your beliefs - Islamic insurance (Takaful) for example.

While there may be more things to navigate for Muslims trying to access mortgages, it's clear that there are options available that don't require you to pay interest. Accessing an Islamic mortgage and other Islamic finance is easy with services like Al Rayan Bank - all while remaining compliant with Sharia law.

If you're ever in doubt about how to get on the market, there are plenty of resources from a number of Muslim scholars out there that you can compare and make the decision that feels right for you. You can also speak to your bank about whether they have any Islamic finance options. There may be a deal you can reach.

At Wayhome, we believe everyone should have fair access to the market. You can always check out our free Islamic mortgage information and contact us to discuss how you want to move forward.

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