Sharia compliant mortgages have to be structured in a way where you don't pay interest. These products are very different and not offered by every lender in the country.
How Sharia compliant mortgages or home purchase plans work
With Sharia compliant mortgages the mortgage lender giving you the mortgage(in practical terms) will buy the whole property and own it outright. You can read a more detailed guide on how this works here.
Sharia compliant mortgages work due to the fact that the mortgage lender buys out the property and at the end of the mortgage you buy the property from them at the same price they paid for it. At this point you will become the legal owner of the property.
At this point, you can sell the property when you want, make any changes you want without seeking permission and ofcourse rent out the property if you feel like.
During the term when the mortgage lender owns the property you will be leasing it from them, in the same way you might pay rent right now for your flat.
The monthly repayments you make will go towards your rent and towards the capital you need to buy the property from the mortgage lender at the end of the term. You do not pay any mortgage interest.
At the end of the term you will now own the property as you will have made the total amount needed to buy the property from the bank. Sharia compliant mortgages usually have longer terms than standard mortgages. And if you miss any monthly payments this will further delay when you can own the property outright.
Providers of sharia compliant mortgages or home purchase plans
You can also compare purchase plans rates here.
You can lose your sharia mortgage or home purchase plan home
If you fail to keep up your monthly repayments you can use your home. Ensure you budget every month and have enough money to repay your sharia mortgage or plan.. If you are struggling financially then inform the sharia mortgage provider so they can assist you.
Types of Sharia compliant mortgages or home purchase plans
With the Ijarah sharia compliant mortgage or plan the monthly payments you make which are a combination of rent, capital towards your house and any charges or fines you might have incurred will be kept aside and at the end of the mortgage term once you have paid enough capital to be able to purchase the home, the home is then purchased by you and transferred in your name. With the Ijara, the home only switches ownership at the end of the sharia mortgage or home purchase plan. This means your ownership of the property remains the same throughout the sharia mortgage term or plan.
The ijara is also referred to as Ijarah
The diminishing Musharaka
The diminishing musharaka is different from the Ijara in the sense that the monthly repayments you make which are a combination of rent, capital towards the purchase of your home and any charges which you may have incurred are put towards your share in the property. As you continue making those monthly repayments, the banks share in the property reduces and as a consequence you have to pay less rent on the banks share of the property. By the end of the mortgage term you will own the whole property outright.
The diminishing musharaka is also referred to as musharakah
What you need to know about sharia compliant mortgages or home purchase plans
Since 2014 sharia compliant mortgage or home purchase plan providers must offer you advice on the suitability of the product and let you know if a more traditional mortgage will be more financially suitable for you.
When providing this advice the provider must inform you if:
you need to pay for their services and how much you need to pay.
The range of products they offer and how suitable you may be for them. They must also let you know the pros and cons of each product. They should also let you know if you will be better served going to an independent financial broker or sticking with them. You will be given the names of the firm’s Islamic scholars. These are the people certifying that the firm’s services comply with Islamic law. If you have any doubts about the Islamic nature of the product or services a firm is offering, you should speak to your Imam or an independent Islamic scholar.
If they recommend a product to you they will also let you know the benefits, risks and features of the product.
They will also provide you with a key financial document showing you the total cost of the product, your monthly repayments and when they will end and if they offer you the product you will get an official letter detailing this.
How to get a sharia compliant mortgage or home purchase plan
To get a sharia compliant mortgage or home purchase plan you will need about a 20% deposit of the property price for you to have adequate mortgage affordability for this type of product. The bank will still look into if you can keep up with your monthly repayments and if you cant it is very likely you will not qualify for the sharia compliant mortgage or home purchase plan.
You can also use any government scheme which the sharia mortgage providers approve of to reduce the amount of deposit you will need to put down or provide you a discount on the property price.
Costs of a sharia mortgage or home purchase plan
Some of the costs you will incur include:
- Home surveys
- Conveyancing fees. Ensure you get a full list of fees from the conveyancer before you decide to go ahead with them
- Home insurance
- Stamp duty
- mortgage booking fee
- Mortgage valuation fee
The risks of a sharia law mortgage or home purchase plan
If your provider goes out of business or sells the shares in your property to another business this may restrict your right to live in the property. Make sure you get legal advice before you agree to anything with a provider.
A solicitor can protect your right to stay in the property by ensuring the lease with the home purchase plan firm is registered with HM Land Registry.
You can check with the Land Registry in England and Wales or the Registers of Scotland (for Scotland) that your lease has been registered by downloading leases and other documents relating to the property for a small fee.