There are two main types of Islamic mortgage available to you in the UK today:
The Ijara Mortgage – “lease to own”
The Murabaha Mortgage – lender resells house to borrower
In the UK, Ijara-based mortgages are by far the most popular and affordable – as you will see, Murabaha-based mortgages require a large amount of available capital.
Ijara Mortgages – Lease To Own
The vast majority of the Islamic mortgages available in the UK are based on the Ijara principle, which can loosely be described as “lease to own”. Ijara mortgages work like this:
- You find a house to purchase and agree a sale price with the seller
- As with any mortgage, you then agree the amount of the mortgage with your Islamic lender- Your lender will then purchase the property outright
- You then enter into two agreements with the lender:
- You will pay back the purchase price of the property in fixed monthly instalments, usually over 25 years (like an interest mortgage).
- You will pay an agreed amount of rent each month – this provides the lender’s profit
- The rent is set annually, and decreases each year in line with your gradual repayment of the purchase price of the property
- When the purchase price has been fully repaid to the lender, ownership of the property is fully-transferred from the lender to you.
Using this system, you can borrow as much as 90% of the purchase price of the property, and repay it until you own the house while providing the lender with a profit that is legitimate under Islamic law (Sharia).
Exact details of these schemes vary between lenders. Make sure you understand exactly how your chosen mortgage works before signing up to it.