Islamic FinanceIslamic mortgage FAQ

Are Islamic Mortgages cheaper

Are Islamic Mortgages cheaper?

The short answer:

No. They are more expensive than a conventional mortgage.

You’ll (usually) pay higher (1) bank charges and (2) solicitors’ fees. Both explained below.

PROBLEM 1: Bank charges

For Gatehouse bank, costs are 25-30% higher compared to a mainstream bank – see our analysis here.

We found the same in our analysis of Al Rayan.

Why do they cost more?

  • Financing

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.

Example:

Mainstream Bank Islamic Bank
  • A mainstream (i.e. non-Islamic) bank borrows £100k off the BoE at the base rate of 0.1%. It then lends that £100k out to Bob at 2% and takes the difference.
  • The Islamic bank on the other hand can’t borrow from the BoE as it can’t deal in interest.
  • They get £100k from savings accounts instead (which they offer via a sharia-compliant structure) for which they have to pay 2% back to the person whose savings it is.
  • They then need to “lend” out at more than 2% to make a profit. So, they lend out at 3% and make a profit.

THEREFORE: The £100,000 costs more to the Islamic bank so they need to charge more.

Hopefully this will change soon as the BoE is working on a sharia-compliant liquidity facility which will allow Islamic banks to borrow directly from them in a sharia-compliant way.

 

  • Size of potential customers

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.

Furthermore, British Muslims are overrepresented in homelessness, poor housing, unemployment and low educational achievements. In 2016, the Muslim Council of Britain found that There are about 750,000 Muslim households, 50% of these have a weekly income of less than £270. This is pre-COVID…

But consider these two points:

Firstly, if a solution like Primary Finance gains traction and gets hold of the necessary liquidity sufficient to reduce its prices to be around Al Rayan’s and to meet the demand, we would prefer it to Al Rayan. But that’s genuinely a big “if”. People like Strideup have tried and failed and have had to pivot to a HPP model.

Secondly, Islamic banks have now reached an agreement with the BoE to be able to get access to sharia-compliant liquidity. This should in theory:

  1. Reduce the cost of capital to the bank, and therefore,
  2. Lead to a reduced rate being charged to customers

This should give some breathing room to the banks to be able to implement some of the risk allocation measures, as well as passing the saving down to customers. IFG will be watching this market closely and fighting for the Muslim consumer to the best of our ability.

PROBLEM 2: Solicitors costs

From my experience in conveyancing, our fees were bumped if a client was purchasing a property with an Islamic mortgage. This could be an increase of 200% or more.

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.

The Islamic banks have their own approved solicitors to represent them in a transaction. This usually ends up reducing solicitors fees to roughly mainstream fees.

But if you don’t use them, this means before anything has even happened, it’s going to:

  1. Take longer because of the extra work.
  2. Cost you more as solicitors will increase their fees.

Gatehouse advertises that it does not charge you for their legal fees – and indeed that has been our personal experience as well. But the contract does allow for them to charge you for all legal and other expenses they reasonably incur whilst preparing your mortgage documentation. Not a massive issue – as long as Gatehouse continue to stick to what they are advertising.

To Conclude…

If you choose an Islamic mortgage, remember this – you’re paying for the halal option. You can compare between all the available providers on our Islamic mortgage comparison here.

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 proper 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.

Sources:

https://mcb.org.uk/wp-content/uploads/2016/01/BMINBriefing7_Jan16.pdf

2 Comments
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2 Comments. Leave new

  • Very nicely explaine,d, Ibrahim.

    I’ll be sharing this with my contacts.

    Reply
  • The options are limited for an Islamic mortgage, but I am very grateful that there are options at all alhamdulillah. Some countries (e.g. France) have no Islamic bank whatsoever, and so shariah compliant finance is severely limited there.

    Reply

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