Al Rayan Islamic Mortgage Review: The Definitive Guide | IFG

This is jointly held by Al Rayan bank and the Buyer and notes the existence of a charge in favour of Al Rayan in the Charges Register associated with this leasehold title.

This is the crucial document that governs the duties and obligations of each party in the initial purchase of the property and the gradual buy-back of the property. It is separate from the lease agreement. It only covers the acquisition cost of the bank, i.e. the initial amount they pay to the seller alongside your deposit.

Here’s a few quibbles we had with this document:

• (5.2) Delay payment – There is a delay payment due to Al Rayan in case you are late in making payments, which Al Rayan subsequently give away, but only after deducting any loss they have suffered as a result. The underlying issue here is that receiving an additional payment above and beyond the due amount as a result of a time delay is considered riba in Islamic law. That’s why Al Rayan gives it away. We are happy Al Rayan to charge this amount, as they need to in order to deter late payments. Our issue is that this will be extremely hard to quantify and practically, the only easy way to quantify it is using interest rates as a proxy. So we’d be interested to hear how Al Rayan practically handles any delay payment money and whether it actually deducts any amount before giving it away to charity.
• (5.3) Tariff List – Firstly, as part of the Tariff List, the buyer has to pay the ground rent. This is typically the responsibility of the freehold title holder – Al Rayan in this case. We can understand why Al Rayan do it commercially – as ground rent can vary hugely and be relatively expensive – which would eat into their margin, but its one of those things that could be reviewed by Al Rayan and paid pro rata to their share. Secondly, there is a £25 administration fee for early repayments. Al Rayan have to allow early repayments as part of the teachings of Islamic law and the minimum early repayment sum is £4000. My concern is that over the course of a two-decade mortgage, an individual may well make over 20 early repayments. This would add up to £500, or 0.5% of a £500,000 financing, for example. 0.5% (or more) actually moves the needle a bit, and I would like to better understand whether £25 is a fair administration fee in this respect.
• 6.1(a) – if the house is destroyed through an insured risk, and the cost of rebuild will be such that the maximum finance-to-value that the bank initially agreed to, is exceeded, then the bank would rather sell the house than rebuild. I get why they would do that (don’t want to overexpose themselves to that individual more than they initially agreed based upon their due diligence) but it does seem rather like kicking a man when he’s down. Though – on the bright side – in the lease you don’t have to pay rent if your home is destroyed.
• (7.4) Reselling your house – bizarrely, you need Al Rayan’s permission to sell directly (unless to family), but you can sell without their permission through an estate agent (though ultimately they will need to be paid off in this case anyway).
• (9.2)(a) Exclusion of liability – the exclusion of Al Rayan liability includes any damage or defect in or to the property (whether such risk is insured or not). The issue here is that Islamic mortgages are supposed to be distinct from normal mortgages due to the different risk profiles (as the economics are largely symmetrical), so the more Al Rayan excludes its liability, the more like a conventional mortgage it becomes. In our view Al Rayan should not be excluding risk that is not insured, because that is then basically leaving them without any exposure to risk that not otherwise covered by insurance or excluded through a contract like the DCA. But more on this insurance point below. To be fair, what is going in their favour in this section is that they don’t force the buyer to pay them their remaining finance amount in the case of a house being destroyed – but they make sure the buyer has to take out an insurance policy sufficient to cover them anyway.
• Schedule 2 (7) – The buyer is required to insure the property entirely at his own expense. We don’t like this – more on this below.

This is the agreement through which the bank charges the equivalent of “interest” under a conventional mortgage structure. In other words, this is the agreement that governs the varying rate that the bank charges each month, depending on LIBOR.

Here’s a few quibbles or notes we had on this document:

• (6.1)(b) – you don’t have to pay rent if your home is destroyed. This is a good thing and a genuine difference between Al Rayan and a conventional lender who would continue charging interest.
• (12) – Al Rayan have excluded liability for any damage caused by them (or someone they’ve appointed) to the property. Circumstances in which the bank would have to get hands-on and do something substantive to the property are unlikely, but they can arise (for example, you tell them of a major structural flaw, and don’t sort it out within a defined period of time set by them and they then have to step in by sending their contractors over). In this case, I would want confirmation that the bank will appoint insured contractors and that I will be able to pursue the bank-appointed contractors for indemnification directly. Because otherwise, if the contractors are hired by the bank, and the bank isn’t interested in pursuing them due to any faults in their work, you as the home owner are not in a great position. But we do caveat all this with the emphatic this is very rare.

This is the agreement through which the bank requires you to maintain and insure the property. This is to make sure that their secured asset (which they can sell in case of default) is kept up to a standard such that it maintains its value. Additionally, it requires you to insure the property so that in the case of an unforeseen disaster, you and the bank are covered for that loss.

The main quibble we had with this document was:

• (2.2) – under the service agreement the buyer can get paid £1 on written demand and in all cases prior to the signing of the agreement. In other words, no one will ever demand this, and by the time they sign, it’ll be too late to demand it. But I might well demand it next time I take out an Al Rayan mortgage!

This is the agreement through which the buyer charges the property against the sums owed to the bank under both the DCA and the lease agreement.