Shariah mortgages

This content applies to Scotland only.

Housing laws vary between Scotland and England. This page applies to Scotland only. Get advice relating to England

Under the Islamic law of Shariah, the charging and paying of interest is not permitted. This means that Muslims cannot take out repayment or interest only mortgages without breaking these laws. This page looks at home finance that complies with Shariah.

What is a Shariah mortgage?

A Shariah mortgage provides a Halal (permissible) alternative to a repayment or interest only mortgage by allowing you to purchase your own home without having to pay interest (Riba).

How do Shariah mortgages work?

There are two kinds of Shariah mortgages:

• Ijara, or lease-to-own
• Musharaka, or deferred sale finance.

Ijara

Ijara is the more popular way of purchasing your home. It works by charging the buyer rent instead of interest.

• First, you find a home you want to buy.
• The bank then buys the property on your behalf and you enter a 'promise to purchase' agreement with the bank. The title deeds of the property will be in the bank's name.
• You will then make monthly payments to the bank. Part of these will go towards paying for the home, and the rest will go towards rent. Your rent payments may be reviewed once or twice a year, and may go up or down.
• The bank will give you an occupancy agreement, setting out the terms and conditions of the lease.
• Once you have bought the property back, ownership is transferred to you and you no longer need to pay rent.

Musharaka

Musharaka works on a sale rather than a loan system.

• The bank buys the home you want then resells it to you at a higher price, calculated according to the value of the property, the length of time you need to pay the money back and the deposit you can pay.
• The property is registered in your name, and you sign a contract agreeing to pay the bank the sale price.
• You then make monthly payments to the bank.

How much can I afford?

Before taking out any kind of mortgage, it's important to think carefully about how much you can afford to pay. Banks will usually offer you around three times your annual income, although this will depend on your situation. Some banks will look more at your ability to afford the mortgage, rather than multiplying your salary - this will depend on your individual circumstances.

Are Shariah mortgages more expensive?

At present, taking out a Shariah mortgage does work out as slightly more expensive than taking out a conventional repayment or interest only mortgage. However, they are becoming cheaper with lenders now offering 10% deposits, and discounts on rent over several years are also being considered.

What about insurance?

Conventional insurance is not permitted under Shariah law. Although you don't have to have life insurance to take out Islamic home finance, you may need buildings insurance. Depending on the bank, you can either take this out yourself, or payment for buildings insurance can be included in your monthly payments. If you choose not to take out accident, sickness and unemployment insurance (ASU), you should also consider what you would do if you fell ill or lost your job and were unable to pay your mortgage.

Some Shariah scholars have said that because no real insurance alternative exists in the UK, if you need to insure yourself and your property, then conventional insurance can be taken out. HSBC have recently launched their Takaful insurance product, which has been approved as Halal - this can now offer an alternative to conventional insurance schemes.

What if I get into difficulties making my payments?

Your mortgage payments should always be your top financial priority. If your circumstances change and you find it difficult to make the payments, get in touch with the bank as soon as possible. They should do everything they can to help you get on top of your payments again.

Because you are not paying interest, you won't be able to claim extra payments for housing costs if you're receving benefits in order to help you pay your mortgage interest. The government is looking into ways to address this problem.

Before you take out a Shariah mortgage, make sure you understand what will happen if you can't make the payments. The bank may charge a fine for late or missed payments, and if you can't keep the payments up, your home may be repossessed. When you make your initial enquiries about the mortgage, ask the bank to explain to you exactly what will happen if you fall behind with your payments.

If you're having problems with your finances, talk to an adviser at the National Debtline, Consumer Credit Counselling Service or a money advice centre.

Can I refinance my home with a Shariah home loan?

Yes. If you currently own your home but would like to switch to Shariah compliant home finance, you can replace your interest mortgage with Ijara or Musharaka finance.

What happens if I die?

If you die before paying off an Ijara mortgage, your home will still be in the bank's name, rather than yours. However, it should be possible for the bank to transfer the Shariah agreement to a person of your choice (for example, your spouse or child), provided they are capable of making the payments. Should the home be sold after your death, the equity in your home will be made available to an allotted person in your will.

If you have a Musharaka mortgage, the home will be in your name, so you can arrange to leave it to the person of your choice on your death.

Can I use a Shariah mortgage for shared ownership or right to buy?

Unfortunately you can't use a Shariah mortgage to finance the purchase of a home through shared ownership or right to buy schemes. This is because Islamic home finance depends on the bank buying your home on your behalf, but councils and housing associations are only legally able to sell homes through the right to buy scheme, or shares in homes through shared ownership schemes, to the tenant, and not to a bank.

What if I have a complaint about a Shariah mortgage?

Shariah mortgages are regulated by the Financial Services Authority (FSA), the UK's financial watchdog. This means that, if you aren't happy with the service you receive from the mortgage company, you may be able to take your complaint to the Financial Ombudsman Service. Download the FSA's leaflet on Islamic home purchase plans to find out more.

Where can I found out more?

www.islamicmortgages.co.uk offers free, independent advice on Shariah mortgages. The website has lots of information about taking out Islamic home finance and lists requirements and application details for the different providers (bear in mind that not all the providers offer Shariah products in Scotland). The website also recommends conveyancing solicitors who specialise in Islamic and Halal mortgages, as well as providing details on Islamic home insurance.