Pros and Cons of an Islamic Mortgage
You want to know the ups and downs of taking an Islamic mortgage. You want it in one concise table. Look no further.
With an Islamic mortgage, you’re most likely going to purchase it under a Home Purchase Plan (HPP). The most popular of which is the Diminishing Musharaka (partnership).
So here let’s focus on the pros and cons. Check this handy table:
|A halal way of purchasing property. |
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.
|BUT… Not all scholars approve of HPP. |
E.g. the opinion of Shaykh Akram Nadwi – Get a conventional mortgage if necessary, as Islamic finance is just like conventional finance dressed up in a religious garb.
Shaykh Haitham Al-Haddad – The Al Rayan HPP is not Islamic; it is too much like a debt instrument (i.e. the buyer is locked into purchasing the entire finance amount back from Al Rayan from day one).
|Avoids paying interest…. |
However it’s not the “same as interest”. The bank is charging you to use the property, not to use their money.
There’s difference between:
· interest (the use of money);
· rent (the use of something); and
· profit (something you add as a mark-up and you’re selling an item rather than money).
…BUT some will argue “the rent is basically the same as interest” …
1. You can sell the property at any time and if the value has gone up, you will benefit because you only have to settle the finance amount with Al Rayan. Subject to admin fees, you do not get penalised for settling your finance early. You do get penalised under a conventional mortgage.
2. It does put the buyer on a more secure and long-term footing than a shorter lease would.
|You are sold back a lease which you pay until you own the property. The leasehold that you own can only be sold or ended by the consent of Al Rayan. |
That’s a restriction on your rights, as compared to under a conventional mortgage where you’ll own the freehold.
Issues can arise If you need a lot of money fast, selling your house may not an option.
… But there’s a chance the LIBOR rate is cheaper.
· You could save – the Islamic banks usually charge less in rent right now than they would if they charged the local rental value.
· Imagine having to quarterly or biannually work out new local rent rates for each of the thousands of mortgage properties that the banks will have on their books. So, from a practical perspective, this would be difficult.
|Under your lease with the bank, the contract will not use local rent values. |
Banks use LIBOR-pegged values to set your rent, rather than using average levels in your local area as a guide (usually means you are paying more than you should) …
… BUT in the case of a sale of the property with a profit, the bank foregoes the profit.
|They don’t share in ownership risk adequately: |
Let’s say under your HPP, the bank owns 70% and you own 30% of the property.
4 issues here:
1) The bank will still tell you, the buyer, to take out house insurance so that everyone is covered.
2) You’re told to maintain the house and make sure its general upkeep is done
3) You have to pay full stamp duty upon the purchase of the house.
4) You’re left exposed to the open market whilst the bank isn’t. The bank will lock-in a price. You have to pay back this, no matter how the value of the house changes (it’s always going up) …
… BUT this method is halal. You always would pay more for the halal option for everything else e.g. food, essentials, so why is a mortgage different?
Compare it to the halal chicken example: haram chicken from the supermarket might be cheaper, but you’d still go to the halal butchers, no matter what the cost, right?
|They are more expensive than a conventional mortgage – article [here] |
IFG has found that Islamic mortgages are almost always more expensive.
· 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.
Therefore, you’ll pay higher 1) bank charges and 2) solicitors’ fees for an Islamic mortgage…
|Fractional reserve banking and money creation: |
97% of our money supply is created by private interest-dealing banks who simply pop money into existence.
IFG has found that Islamic banks do the same.
|Practically they are much more difficult to deal with |
With my experience in conveyancing, dealing with Islamic mortgages can be difficult.
The Islamic banks have their own approved solicitors to represent them in a transaction. If you don’t use them, this usually means before anything has even happened:
1) It’s going to take longer because of the extra work.
2) It’s going to cost you more as solicitors will increase their fees.