A sharia-compliant mortgage allows you to buy a house in a sharia-compliant manner over a number of years without using any interest (riba). sharia mortgages are commonly known as “islamic mortgages.

There are different types of Islamic mortgage products.

In the UK there are 3 types of Islamic mortgage products being offered:

  • diminishing musharaka, aka the Home Purchase Plan
  • Ijarah aka “rent-only” Islamic mortgages
  • murabaha mortgages

Diminishing musharaka, aka the Home Purchase Plan

This is the most common type of Islamic mortgage product you will see. It is also often referred to as the “Home Purchase Plan” or “HPP”.

The concept is pretty straightforward. You buy a percentage of the house with your deposit and that is yours. The rest of the house is the bank’s and they rent that to you.

Over time you buy the bank out and your rent decreases as you buy the bank’s stake out.

Eventually you are the full owner of the property and the bank disappears.

Of course, there’s a ton more complexity to it in practice. If you’d like to take a peak under the bonnet and see how the whole thing works mechanically and legally, see this article here. It has a detailed summary of the Al Rayan structure, but most HPP providers will follow a very similar structure.

Ijarah aka “rent-only” Islamic mortgages

This is the equivalent of the Home Purchase Plan apart from you don’t buy back the bank’s portion. At the end of the mortgage, you either buy the bank’s portion in full, or you sell the house to raise the money to pay the bank back.

Murabaha

This kind of mortgage is often used in commercial property finance structures by the Islamic banks (Al Rayan, Gatehouse, Al Ahli United, BLME etc) including buy-to-let mortgages as well.

Murabaha itself is a simple concept. The bank buys the property on your behalf, and then sells it to you immediately for a marked-up price, to be paid over a number of years. For more details on this structure, see here.

However, certain Islamic banks, e.g. Gatehouse, use commodity murabaha (also known as “tawarruq”) to structure their commercial property financing transactions. This is not ideal as an Islamic structure for reasons explained in this article. In a nutshell, this kind of structure is only in line with the sharia in form, but not in spirit.

You can compare the Islamic mortgages available in the UK here.

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