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ISLAMIC MORTGAGES
(Halal as per an Ijara & Murabaha agreement)
Islamic and Coventional Mortgages Compared
Islamic Mortgage
These are interest free and are called Murabaha, deferred sale agreement and Ijara, lease to own.
- Sources of income and credit references for the loan can be re-examined before retirement age.
- The property's value must be at least £50,000.
- Provide funds up to 80% of the property's value.
- Life and building insurance is not compulsory.
- The bank owns the property immediately.
- Payment terms for the Murabaha is a minimum of 5 years and a maximum of 15 years. The Ijara has a minimum of 7.5 years and a maximum of 25 years.
- Funds available for a Murabaha are up to 2.5 time the annual income. For an Ijara its up to 3 times the annual income of the sole applicant.
- An arrangement fee of 0.75% is payable on the property's value after the first payment.
Conventional Mortgage
- Funds are borrowed from the lender and interest is charged for the duration of the loan.
- Sources of income and credit references for the loan can be re-examined before a 65th birthday.
- Most lenders have no lower limit on the property's value.
- Lend up to 125% of the property's value.
- Life and building insurance will be compulsory in most cases.
- The borrower owns the property not the lender.
- Payment terms can be up to 40 years.
- The amount borrowed can be up to 5 times of the sole applicant.
- An arrangement fee up to an agreed sum.
Example of an Islamic Mortgage (as per an Ijara agreement)
If the price of a property is £100,000, the buyer has to make a down payment of 10%, £10,000. The bank pays the remainder. At this stage, the buyer and the bank are co-owners. If the buyer wishes to occupy the house, he will have to pay rent to the bank. The buyer can buy out the bank interest in the property by making additional payments. This way, the buyers share in the property increases as the banks share decreases and the rent payments will therefore change proportionately. If the rent is the same amount as a repayment under a conventional mortgage e.g. £660.39, 10% goes to the buyer as his share in the property and the bank gets the 90%. The borrower will own the property outright once the final payment has been made, (the 350th payment). The borrower will have paid a total of £231,018.30, this amount includes the banks share of the property as having been £141,018.30.
Example of a Coventional Mortgage
The property price is £100,000. The bank will be looking for a 10% deposit, with a mortgage period of 30 years, on £90,000 with an annual interest rate of 8%. (Example rate only, ask for a personal quote).The monthly repayment figure would be £660.39. Each payment makes up some of the interest due and some of the capital borrowed. The buyer will make 360 monthly payments in total. The total cost borrowed will be approximately £237,740.40. This figure includes the amount of £147,740.40, which is the interest paid on the £90,000 borrowed.
Muslim Mortgages
Mortgages available through British financial institutions have always been interest-based, something which does not comply with Islamic Sharia law, and as such are largely unacceptable to Muslims and would be against their religious principles.
Many Muslims in Britain, of which there are currently 4.5 million, find themselves trying to balance their Islamic principles with the realities of the British mortgage system, and often conclude they have no choice but to reluctantly take out a traditional interest based mortgage.
Sharia-complaint products currently available in the UK are based on Ijara and Murabaha methods:
Ijara
The financial institution purchases your chosen property.Whilst you live in their property you make payments to the financier to repay them the exact purchase price, which can be spread over up to 25 years.
During your payment term you are also charged rent for living in the property that the financial company owns.
Once you have repaid the money they spent on the property purchase the property is sold to you.
Using this method the financial institution makes its profit from the rent you pay them. The rent is not another name for interest, it is seen as a fair payment for use of the property rather than a charge for borrowing money.
Murabaha
The finance company purchases your chosen property from the seller at their original price, they then sell it immediately to you at a higher price.The amount of the higher price can be paid back monthly to the financier over a period of up to 15 years.
The financiers profit with this method is gained from the higher sale price of the property.
One of the major factors that was holding back the market was that stamp duty must be paid twice on Islamic mortgages, firstly by the finance company, and then by the customer. However since April 2003 no more double stamp duty as this was abolished by the government on Islamic mortgages and has only now to be paid.at the time of the new purchase, there will therefore no longer be a second amount of Stamp Duty payable when the property is transferred from the Bank to the individual.
The Council of Mortgage Lenders is urging the Government to make it simpler and cheaper to provide Sharia-compliant mortgages, as legal hurdles make existing schemes relatively expensive.
Currently only a few lenders in the UK offer Sharia compliant mortgages however please contact us for further assistance and information.
