Muslim Mortgage

Muslim mortgages are a new product on the mortgage market. Under Sharia (Islamic law) it is forbidden to lend money and receive interest without rendering any type of service. Borrowing under such a scheme is also forbidden.

Mortgage lenders have been coming up with mortgages specially design to comply with Sharia.

There are two mortgage systems compatible with Sharia. The first and most popular is the Ijara type mortgage which works by having the lender buy the property of your choice. After the property is bought the purchase price is repaid in the form of fixed monthly installments over a number of years, usually up to 25 years.  In addition to the repayment of the purchase price the mortgage holder pays monthly rent over the period of the mortgage. The rent is set each year, is below the market level and decreases as more of the capital sum is repaid. Once the whole capital amount is repaid the property rights will be surrendered to the mortgage holder.

The second type of Islamic mortgage is the Murabaha type mortgage which works by depositing 20% of the purchase price of the property of your choice. The lender purchases the property after which he resells to you at an inflated price. After that the inflated amount is repaid to the mortgager over a period of usually no more than 15 years.

Although the Ijara mortgage is by far the most popular you will still have to be careful as offers differ between lenders and shopping around can save you thousand of pounds in rent payments over the life of the mortgage. The Murabaha type mortgage is much less popular because of it short duration and high costs.