How does Islamic mortgages work?
In our modern society, we are accustomed to having a plethora of options available to us. We must never settle for less or sacrifice our principles and beliefs. If you are seeking Shariah-compliant methods to purchase homes, we understand that this is your preference based on your religious beliefs. Connect Mortgages are committed to respecting your request by ensuring our processes align with Shariah guidelines. We previously brought you an article on “Do UK banks offer Islamic mortgages?” We establish that they do, but today’s question is, how does an Islamic mortgage work?
Islamic mortgages, also known as no-interest home purchase plans (HPP), operate similarly to conventional mortgages but with a distinct feature: the absence of interest. Instead, these mortgages incorporate a leasing element to comply with Shariah principles. Upon approval, you will receive the necessary funds to purchase a property.
Here’s how it works:
The bank acts as the legal owner and purchases the property on your behalf. As the occupant, you will make monthly payments structured similarly to rent. These payments contribute towards gradually buying the property from the bank without including interest charges.
Opting for an Islamic mortgage fulfils the halal requirement of avoiding interest-based transactions. Over the course of your mortgage term, as you make regular payments, you progress towards complete ownership of the property. Once you have successfully completed all payments within the agreed-upon term, the property becomes entirely yours. If there is a remaining balance at the end of the term, it must be settled to obtain full ownership.
Can anyone get an Islamic mortgage?
Islamic mortgages are available to anyone who prefers the ethical principles of Islamic finance and wishes to avoid interest-based loans. If you prioritise transparency and want to clearly understand the total cost of your loan upfront, an Islamic mortgage aligns with your preferences. 
One of the critical advantages of Islamic mortgages is the absence of interest rates, making them ethically sound according to Islamic principles. By opting for this type of financing, you can be confident that your loan is interest-free.
Moreover, ethical lenders who offer Islamic mortgages ensure that the funds raised are not reinvested in industries that contradict Islamic beliefs, such as alcohol or gambling. This way, your financial transactions remain consistent with your values and religious beliefs. Whether you are a Muslim or someone who shares the ethical considerations of Islamic finance, you can choose an Islamic mortgage as a viable alternative.
How do you know that banks are Shariah compliant if it’s not an Islamic bank?
To ensure that banks and financial institutions offering Islamic mortgages are Shariah compliant, they need to seek guidance and certification from recognised authorities in Islamic law. These authorities are typically comprised of Islamic scholars with expertise in finance and Islamic principles.
Financial institutions that offer Islamic mortgages should be transparent about their Shariah compliance process. They often consult with Islamic scholars or establish Shariah boards to oversee their operations. These boards review and approve financial products, including mortgages, to ensure they adhere to Islamic principles.
When considering an Islamic mortgage from a bank or financial institution, it is recommended to inquire about their Shariah compliance process and any certifications they have obtained. Reputable providers will have documentation and evidence of compliance, such as certifications from recognised Shariah boards or endorsements from reputable Islamic finance organisations.
By seeking guidance from established authorities in Islamic law, banks and financial institutions can offer Islamic mortgages that align with Shariah principles, assuring customers who prioritise adherence to Islamic ethics and beliefs.
How much deposit do you need for an Islamic mortgage?
To qualify for an Islamic mortgage, it is generally required to provide a minimum deposit of 20 per cent of the property’s purchase price. This is consistent with the deposit requirements for conventional mortgages in many cases.
In addition to the deposit, other costs are associated with purchasing a property that must be considered. These include surveys, building insurance, stamp duty (a tax on property transactions in the UK), and other expenses such as mortgage broker fees and legal costs. It is essential to budget for these costs to ensure a smooth and successful homebuying process.
It’s worth noting that the specific deposit requirements and associated costs may vary depending on the lender, the type of Islamic mortgage product, and individual circumstances. It is advisable to consult with a reputable Islamic mortgage provider or financial advisor who can provide detailed information based on your specific situation.
Conventional mortgages Vs Islamic mortgages
Islamic and conventional mortgages differ in their underlying principles and practices. While traditional mortgages operate based on the concept of interest, Islamic mortgages follow Shariah principles prohibiting the charging or payment of interest.
In Islamic mortgages, the bank typically purchases the property on the customer’s behalf, allowing the customer to make payments over time. This structure ensures the transaction complies with Islamic law.
In terms of risk, Islamic mortgages are regulated by the same financial authorities as conventional mortgages. Islamic banks are subject to the oversight and regulation of regulatory bodies such as the Financial Conduct Authority and the Prudential Regulatory Authority. This ensures that customers of Islamic banks are legally protected and have avenues for recourse in case of any issues or disputes. 
Additionally, the Financial Services Compensation Scheme applies to Islamic banks as well. This means that deposits up to £85,000 in savings or current accounts with Islamic banks are protected by the FSCS, providing customers with an additional layer of security.
Furthermore, some individuals may perceive Islamic banks as safer due to their adherence to Islamic principles. Activities considered high-risk, such as derivatives trading, speculative investments, or financing prohibited industries, are prohibited in Islamic banking. This adherence to ethical guidelines may appeal to individuals seeking a more conservative and socially responsible approach to banking.
As we stated, Islamic financial products, including mortgages, are not exclusively limited to Muslims. Many non-Muslims also choose Islamic banks for various reasons, such as attractive savings rates or the flexibility of certain products like Home Purchase Plans that allow early repayment without penalties.
Ultimately, the choice between an Islamic and conventional mortgage depends on individual preferences, religious beliefs, and financial goals. When considering different mortgage options, it’s essential to carefully evaluate the terms, features, and compatibility with personal values.
What you need to know
At Connect Mortgage, we understand that obtaining a mortgage involves considerations beyond finances. Cultural and religious factors are significant for many individuals. That’s why we proudly offer Islamic mortgages that adhere to Shariah guidelines.
You can have complete peace of mind when you choose Connect Mortgage for your Islamic mortgage needs. Our dedicated team is committed to providing a transparent and ethical experience. We understand the importance of an interest-free loan that aligns with your religious beliefs.
We invite you to contact us if you’re seeking a Shariah-compliant mortgage option. Our knowledgeable team is ready to assist you every step towards home ownership. Please don’t hesitate to contact us and let us know how we can help. We are delighted to be your trusted partner in fulfilling your home ownership goals.
