Islamic Mortgage Guides and FAQs
What is an Islamic Mortgage?
An Islamic mortgage is a way for Muslims to buy a home without dealing with riba (interest), which is prohibited in Islam.
Unlike a conventional mortgage – where a bank lends you money and charges interest – an Islamic mortgage avoids interest altogether by structuring the deal differently.
The 3 different types of Islamic Mortgages
There are a few common models, but the most popular in the UK are Murabaha, Ijara, and Diminishing Musharaka. The most common is Diminishing Musharaka.
What is a Diminishing Musharaka mortgage and how does it work?
Diminishing Musharaka is the most common type of Islamic mortgage in the UK. Here’s how it works: you and the bank jointly purchase the house. You might put down, say, 10% as a deposit, and the bank covers the remaining 90%.
Each month, your payment has two parts:
Rent – for the portion of the house the bank still owns
Purchase payment – to slowly buy more of the bank’s share
Over time, your share increases, the bank’s share decreases – and eventually, you become the full owner.
The key idea is that the bank isn’t lending you money – it’s investing with you. That way, the structure avoids interest and stays within Islamic principles. You still make monthly payments like a normal mortgage, but the contract and the intention behind it are different.
What is a Murabaha mortgage and how does it work?
Murabaha is a simpler, more upfront model. Instead of a loan, the bank buys the property you want and immediately sells it to you at a higher price – with that profit agreed in advance. You then repay that total amount over time through monthly instalments.
For example, if a house costs £200,000, the bank might sell it to you for £240,000, and you pay that off over 20 or 25 years. There’s no rent involved – just a fixed repayment plan.
This method is less common for residential homes in the UK because it tends to be more expensive, especially if property values drop. But it’s still used in some cases, especially for commercial properties or buy-to-lets.
What is an Ijara mortgage and how does it work?
Ijara works like a lease-to-own arrangement. The bank buys the house with you and leases their portion to you.
So let’s say you buy a house for £100,000, and pay £20,000 as a deposit and £80,000 is contributed by the bank. Under an ijarah or “rent-only” mortgage, you pay the monthly rent each month on the bank’s portion of the house, but you don’t make any payments towards buying the bank’s portion.
This sort of mortgage is typically not advisable for a home purchase where you plan to live, as it can mean you having to end up selling your house at the end of the term in order to pay the bank back its £80,000.
However, this type of mortgage is often seen in a buy-to-let context, as there, sometimes people are looking to generate as much monthly cash flow as possible, and don’t particularly care about actually owning more of the property.
For more on Islamic mortgages check out our article here.