We write a lot of analysis on IFG, but this article is designed to give you all the essential info you need to get yourself an Islamic mortgage in the UK in 2020. We have pooled our various industry conversations into one condensed article for you to make your life easier.
We look at the different types of halal mortgages available right now, who offers them (you’ll be surprised at just quite how many options there now are), and our thoughts on who to go for, and for what.
Also, if you’re actively looking to take out an Islamic mortgage you should use our nifty comparison page to quickly pinpoint the most suitable bank and mortgage product for your needs.
But first, a few preliminary questions:
Preliminary Question 1: What is an Islamic mortgage//halal mortgage?
We all know interest-bearing loans are prohibited under the sharia – and conventional mortgages are very much that. So how to get around that? Well, Islamic banks have come up with a product called the “Home Purchase Plan” or “HPP” which allows Muslims to buy a house without taking out an interest-bearing loan.
The HPP allows you to buy a property in partnership with the Islamic bank, paying rent each month on the portion you don’t own and slowly also increasing your stake in the house. In other words, the Islamic bank replaces the “interest” component with “rent”.
In principle this is fine from an Islamic law perspective – but only as long as the risk profile of the transaction is actually equivalent to the Islamic bank “renting” as opposed to “loaning”. We have gone into this issue in exhaustive detail in our detailed review of Al Rayan Bank’s HPP here. In a nutshell though, our considered view is that HPPs are halal.
Preliminary Question 2: Are Islamic banks riskier than a conventional bank?
Not really. Islamic banks are fully regulated by the Financial Conduct Authority and the Prudential Regulatory Authority and so have to meet their stringent criteria. Additionally, the Financial Services Compensation Scheme (“FSCS) applies to Islamic banks as well – so £85,000 of your money in a savings/current account with an Islamic bank will be secured by the FSCS in case the bank collapses etc.
In fact, Islamic banks are arguably safer than mainstream banks as they don’t engage in prohibited activities under the sharia, such as derivatives and exotic instruments trading.
Consequently, a large percentage of Islamic bank customers are actually non-Muslims who are looking to take advantage of either (i) the market-leading savings rates offered by such Islamic banks; or (ii) take out a HPP where there is no penalty for early repayment.
Different Types of Islamic Mortgage Available in the UK
Diminishing Musharaka Islamic mortgage
The diminishing musharakah structure is the most common structure in the UK and if you’re getting a HPP you’ll almost certainly be using this structure. Under this structure, the purchaser and Islamic bank will be purchasing the property jointly. The purchaser then slowly buys the property back from the bank by paying rent on the bank’s portion, as explained above.
The purchaser will need to put down a deposit at the time of purchase however. The lowest deposit available in the market right now is 5%, but if you want to avoid paying hefty rental fees you should aim to have at least 20%. You can see all the UK Islamic mortgage products available today on our comparison page.
Ijara Islamic mortgage
The ijara mortgage is basically the diminishing musharakah, apart from there is no “diminishing” going on. 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.
Murabaha Islamic mortgage
Under a murabaha structure, the Islamic bank will purchase a property on your behalf, and then sell you the same property at a marked up price.
So you go the Islamic bank and say “I want this property worth £100,000.” The bank agrees, appoints you as its agent, and you go off and buy the property for the bank. The bank now owns the property.
The bank now sells you this property for £125,000, payable over 20 years, and you now own the property (subject to you keeping up with your payments).
In Britain, the murabaha structure is sometimes seen in a buy-to-let scenario, in commercial property development financings, and in bridge financing situations. It is not typically seen for a residential Islamic mortgage. However, it is much more common in the Middle East and Far East. From a sharia perspective, the majority of scholars both from the Middle East and Far East are comfortable with this structure.
A murabaha structure is not to be confused with a commodity murabaha structure (also known as tawarruq). At IFG, we prefer other structures ahead of a commodity murabaha structure, due to sharia compliance concerns. You can find out more about that structure and why we’re not that keen on it here.
Which Banks Do Not offer Halal Mortgages?
Before we list the Islamic banks that do offer Islamic mortgages today, its important to clear up a bit of confusion on banks who have previously dabbled with Islamic finance:
HSBC is the biggest UK bank, and at one point it branched out into Islamic finance under its Amanah Finance brand. However, this is no longer running, and HSBC has not been in the market to issue Islamic mortgages for a number of years now.
Lloyds used to offer Islamic current accounts – where they didn’t give any interest on the monies held in such accounts nor use the monies deposited for haram activity. Sadly they binned the Islamic current account in 2018. They also offered Islamic mortgages in the more distant past but have stopped those too.
Al Buraq Finance
Arab Banking Corporation used to offer Islamic mortgages in collaboration with Bristol & West under the “Al Buraq” name. However they have not been offering Islamic mortgages for a number of years now.
Which Banks offer Islamic Mortgages in the UK in 2020?
Al Rayan Bank (formerly Islamic Bank of Britain)
Al Rayan Bank are the largest and oldest Islamic bank. They have the widest range of Islamic mortgage products in the market, and are well capitalized. That last bit is important – because sometimes banks say they are ready to give out mortgages, but don’t in reality have sufficient money to do that at any great scale. Al Rayan do.
Al Rayan are the go-to bank when it comes to 95/90% LTV Islamic mortgages and are also shortly about to launch a commercial development product as well. On average, they are a little bit more relaxed in their underwriting than Gatehouse.
Check out our detailed review of our detailed review of Al Rayan Bank’s HPP here.
Gatehouse was established in 2007 but has only recently started offering retail HPPs and Buy-to-Lets. It is looking to quickly grow in this market and has aggressively undercut Al Rayan on some of the key HPP products (e.g. the 80% LTV Islamic mortgage).
This competition is only good for the Muslim consumer and we expect customer care standards and pricing to improve as a result.
For a detailed comparison of Islamic mortgage rates, check out our comparison page.
Ahli are the UK arm of NCB, the second largest banking group in the Middle East. They have offered HPPs for a number of years, though their usual clientele are those looking to buy larger, more expensive properties, generally in the London area.
So their products are not suitable for most, but where they do become suitable (for example a 65% LTV mortgage in London where you’re looking to borrow over £250,000), they often have great rates. So for someone who already has an Islamic mortgage and wants to refinance, Ahli might be worth a closer look.
Heylo Housing is an alternative to a mortgage. It provides a shared-ownership model where you can buy back as much (or as little) of your house as you like.
Generally they are most suitable for those who are otherwise struggling to get an Islamic mortgage with a mainstream Islamic bank – because Heylo’s rates tend to be more expensive and not worth it if you can go for an Islamic bank instead.
From a shari’ perspective they’re great, as they don’t lock you into buying back the Heylo portion of the house, and as such there isn’t a “debt-like” element to the structure like there arguably is with a standard HPP.
Which Banks/Companies are shortly going to offer Islamic mortgages?
We have followed Strideup for a number of years and are pleased to see the progress they’ve made over the years. They are currently developing the next phase of their product and we expect them to be offering HPPs by mid-2020.
Wayhome, formerly Unmortgage are another alternative to a mortgage, providing a shared-ownership model. They’re well-funded like Heylo and we’re excited to see what they come up with when they finally launch.
Primary Finance is a start-up that is still going through the FCA regulatory process. We’re very excited about them – provided they secure the financing they need to be able to execute on their vision. Check out our podcast with them here. In a nutshell, they to are an alternative to a mortgage and provide a shared ownership structure – but they believe that they can offer such a structure at Islamic bank (or lower) rates. Big aims – but if they achieve it, I’ll be switching for sure!
UBL offer Islamic mortgages – at least that’s what their website says. But from the multiple times we have called them, we have either not got through, or the person we have spoken to has very little idea about their products. We understand from industry conversations that they’re ironing out a few regulatory issues in the background.
We hope they get everything sorted and do come to market properly soon!
Habib Bank is a household name across Pakistan, and they do significant business in the UK too. From industry conversations we understand that they too will be shortly launching their Islamic mortgage products. We look forward to them joining the market!
There are in fact a few more Islamic banks/companies that may or may not be coming to market soon to offer Islamic mortgages, but because they’re currently at a very embryonic stage, we reserve mention of them until they progress a little on their journey.
Should you rent instead?
People often think that buying is the most sensible financial decision. But, in some cases, renting can make better financial sense and give you the flexibility to move (for your job etc) quickly.
Something most people don’t think about is what would happen over the long term if, instead of using your saved-up deposit towards your house, you actually invested it and made a return on it.
We’ve made a nifty calculator that lets you plug in the numbers to work this out for you. Check it out here.
The Islamic mortgage space is set to hot up significantly in the coming months and years and we expect that this will improve customer service, pricing, and availability across the board. That can only be a good thing. Additionally, through our analysis and commentary on the sharia status of each of these Islamic banks’ products, we hope we can influence the market towards products that are halal both in form and in spirit.
Please do subscribe to IFG – every new subscriber gives more weight to our mission to do this.
Finally, you can quickly compare Islamic mortgages here.