You want to buy a house in a halal way, but right now you’re confused between the halal/haram debate as well as how expensive Islamic mortgages are. You’re also wondering where you can find the best one.
We already have plenty of info on Islamic mortgages for you, such as:
- Our definitive detailed guild;
- An explainer on what makes an Islamic mortgage halal; and
- A handy table listing the pros and cons of an Islamic mortgage.
In this article we’ll cover 4 reasons as to why you should be taking out an Islamic mortgage:
- Islamic mortgages are halal.
- Islamic mortgages are more expensive – but for a reason.
- Use a comparison site for the best deal.
- Buying can be better than renting.
1. Islamic mortgages are halal
You won’t pay interest
Problem: We know interest is strictly prohibited in Islam – it’s classed as a major sin.
Solution: An Islamic mortgage is structured as a Home Purchase Plan (HPP). This avoids paying interest.
There are three types of HPPs – the most common is the Diminishing Musharaka
- It’s a co-ownership agreement.
- The bank will own most of the house (e.g. 80% of it) and you’ll continue to pay ‘rent’, buying further equity, until you have 100% ownership. Your share of ownership grows and theirs will shrink.
- What makes this halal? The bank shares the risk of ownership with you. In other words, the bank is holding 80% of a property on its accounts, rather than an £80k debt.
Scholars have approved the HPP method
The HPP method has been approved by scholars such as Shaykh Taqi Usmani, Shaykh Abu Eesa and Sheikh Dr Abdul Sattar Abu Ghuddah among many others.
2. Islamic mortgages are more expensive – but for a reason.
Yes, they are more expensive than a conventional mortgage. However, they are also not completely unaffordable and much cheaper than renting.
We’ve written a full explanation as to why they are more expensive here.
In brief, this is because you’ll (usually) pay higher (1) bank charges and (2) solicitors’ fees:
- The cost of financing is generally higher for Islamic banks. This is because they can’t borrow from the Bank of England (yet) or the mainstream money markets at low-interest rates. They have to get their money from savings accounts and Sukuk offerings. This is more expensive because people with a savings account or holding Sukuks want to get paid.
- The size of potential customers is smaller. Muslims in the UK constitute about 5% of the population. Only a subset of them cares enough to use Islamic mortgages. Therefore, the target audience is (relatively speaking) tiny. Its prices won’t benefit from the economies of scale that larger lenders benefit from and reflect in their pricing.
Conveyance solicitors will bump their fees if a client was purchasing a property with an Islamic mortgage. This could be an increase of 200% or more.
Why? Practically Islamic mortgages are much more difficult to deal with and take up a lot more time. More clients = more money for solicitors. Time lost dealing with complex loans = less money to make from taking on new clients.
3. The best place to go to compare is a comparison site.
We’ve mentioned, you’ll probably be paying more for an Islamic mortgage compared to a conventional one. However, that doesn’t mean can’t find a good deal. You can use using a comparison site – specifically for Islamic mortgages.
Every bank will have their own calculators. Unlike IFG’s, a bank-specific calculator will only show you offerings for their products. You can use the calculators on IFG calculators to compare different banks against each other. Of course, use every tool you have out there.
The IFG calculators will give you an idea of what you could finance. We offer four:
For more info and explanations on comparison engines, we have an article here.
4. Buying can be better than renting
This is the million (or probably £100k+) question – to buy or rent?
Buying a house might not be for everyone. However, it could cause you to lose £100,000s over the next few decades. The only Islamic way to do that in our humble opinion is an Islamic mortgage.
To find out what is best for you, see our buy or rent calculator – It’s super easy to use.
If you really want to buy a house with a mortgage and you’re really concerned about it being halal, then the safest option would be an Islamic one.
Islamic mortgages are currently the only genuine solution for Muslims in the UK. It’s a small and relatively new market. It’s not cheap setting up a properly regulated bank, raising necessary liquidity, and adhering to tight regulatory and liquidity rules. The product must effectively minimize risk for itself as much as possible and mimic the debt-like characteristics of mainstream mortgage providers.