There are a few different types of Islamic mortgage, and a small number of lenders who offer them. Learn more about what’s available and how your payments will work.
What is an Islamic Mortgage?
Islamic mortgages are Sharia-compliant home purchase plans to help you buy your home in a way that doesn’t involve paying interest.
How do Islamic mortgages work?
There are three types of Sharia-compliant home purchase plans:
Ijara
Murabaha
Diminishing Musharaka.
They all work differently, so it’s important to understand the differences before choosing.
Ijara
Ijara is a ‘lease-to-own’ agreement. With an Ijara plan, your lender purchases the property outright. You’ll then make monthly payments that cover:
the purchase price of the property
rent
any other charges.
At the end of the plan, you’ll have repaid the full amount for the property. This will mean you now own the property outright.
Murabaha
In a Murabaha plan, your lender buys the property and sells it on to you straight away at a higher price.
You’ll need to pay an initial deposit, usually at least 20% of the purchase price.
You’ll then be paying your lender back in fixed repayments for an agreed length of time. You can repay the loan in full at any time with no penalty.
Diminishing Musharaka
Diminishing Musharaka means both you and the bank or building society own the property together, with separate stakes.
Each repayment is used to buy the bank’s shares in the property over time. The repayments cover rent, property purchase and any other charges.
As your stake grows, the bank’s stake shrinks. This reduces the amount of rent you have to pay.
Deposit, fees and costs for Islamic mortgages
Deposit
You’ll typically need a deposit of at least 20% of the property to qualify for a Sharia-compliant home purchase plan.
For example, if the property you want to buy is valued at £200,000, you’ll usually need to put down at least £40,000.
Fees and costs
When working out what you can afford, remember to budget for the following:
survey
buildings insurance
lender’s valuation fee
legal fees.
Your lender will explain all the fees it will charge you.
Work out what you can really afford
It’s important to think carefully about how much you can afford, both for upfront costs and your monthly payments.
Keep in mind that your costs might go up in the future, as the rent will usually be reviewed every six months.
Beware
If you can’t afford to keep up your repayments, you might lose your home.
Budget planner
To help you manage your money, try our free and easy-to-use Budget planner.
Getting an Islamic mortgage
There are a few banks offering Islamic mortgages, including:
This is a growing market, so more options are becoming available over time. It’s a good idea to talk to an adviser who can help you assess all the options on the market.
Getting advice on the right plan for you
Home purchase plan providers will ask you questions about your financial circumstances and must only recommend a suitable product to you.
Find out more about Choosing a mortgage adviser.
Information you’ll get about the provider’s service
The home purchase plan provider must explain the service they’ll give you.
This must include:
whether you’ll have to pay for their service
the fees they charge
the range of products on offer, making it clear if there are any limitations.
You’ll also usually be given the names of the provider’s Islamic scholars. They make sure the services comply with Islamic law.
If you have any doubts about the Islamic nature of the product or services, speak to your Imam or an independent Islamic scholar.
Information you’ll get about your home purchase plan
In any sale of a home purchase plan, you’ll be given documents showing:
the key facts, risks and features of this home purchase plan
the overall cost of the plan and how much you’ll pay each month.
Protect yourself
If you’re unhappy with your lender, such as if they’ve acted unfairly or weren’t clear when agreeing your mortgage, you can complain. View our guide How to complain to your bank, lender or card provider.
Home purchase plan providers are required to protect your interests. But there will be limits to what they can do.
For example, if the provider goes out of business or sells its share of the property to someone else, you might risk losing your share of the property and your right to live there.
It’s important to get independent legal advice to make sure your interests are properly protected. A solicitor can protect your right to stay in the property by ensuring your lease is registered with HM Land Registry.
You can check your lease has been registered:
in England and Wales, at HM Land RegistryOpens in a new window
in Scotland, at Registers of ScotlandOpens in a new window
