Islamic Sharia Mortgages Guide
Youssef Hamouda
Trainee Solicitor
Overview of Islamic Sharia Mortgages in Islamic Finance
Islamic Finance is a term used when referring to financial transactions that are compliant with the basic principles of Islamic law (Sharia). Products and services in Islamic finance are therefore sometimes referred to as “Sharia compliant”.
For many Muslims in the UK, buying a home using conventional mortgage products can raise ethical and religious concerns. Conventional mortgages rely heavily on interest (riba), which is strictly prohibited (haram) in Islam. On the other side, Sharia compliant mortgages have emerged to offer an alternative route to home ownership without compromising Islamic principles. Islamic Sharia principles include the views that:
- Money has no intrinsic value. It can serve only as a medium of exchange.
- The payment or receipt of interest is prohibited. Trading or investment income is however permissible.
- There should be a focus on real‑economy activity, and an emphasis on fair apportionment of risk and reward.
- Investment in activities considered to be socially detrimental should be prohibited. This includes investment in sectors such as tobacco and alcohol.
Before we proceed in this guide, it is important to note that 45% of UK homebuyers would consider using an ethical home finance provider that aligns with Islamic principles says Gatehouse Bank.[1]
[1] See Gatehouse Bank https://gatehousebank.com/news/almost-half-45-of-uk-homebuyers-would-consider-using-an-ethical-finance-provider-that-follows-islamic-principles-finds-gatehouse-bank
How do Sharia compliant mortgages work?
Islamic mortgages are not a mortgage per se. Instead of charging interest, Islamic financial institutions use different types of arrangements and products called “Home Purchase Plan” which involve the bank and buyer jointly purchasing the property or leasing it with no interest payable.
Why traditional mortgages are not permissible in Islam?
At the heart of Islamic finance is the prohibition of riba which simply means any guaranteed interest on loans. In conventional mortgages, financial institutions lend money with the expectation of being repaid with added interest over time. Islam considers this unjust, as it allows one party to profit without sharing in the risk or contributing real value. Accordingly, Muslims seeking to adhere to Sharia law often avoid conventional mortgages altogether.
What are the risks of using Islamic Banks?
Islamic finance has developed rapidly in the UK over the past decade, with strong support from the government for its growth and promotion. In the UK, all financial institutions operate under a unitary, principles-based regulatory framework. According to the Bank of England, firms offering Islamic financial services are not subject to a separate set of rules. This means that Islamic financial institutions are fully regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), and must meet the same standards as conventional banks. Additionally, the Financial Services Compensation Scheme (FSCS) applies to Islamic banks. This means that up to £85,000 of your money in a savings or current account with a UK-based Islamic bank is protected in the event the bank fails.
What are the common sharia compliant mortgage products
What are the common sharia compliant mortgage products
These products have been developed so that they fall within the regulatory and legal framework of England and Wales.
- Ijara Islamic Mortgage (Lease-to-Own Model)
In this agreement, the bank buys the property and leases it to the customer for a fixed term. The customer makes monthly payments, part of which covers rent and part of which goes toward purchasing the property. Over time, the buyer gradually acquires full ownership.
- Musharakah Islamic Mortgage (Diminishing Partnership)
This is the most common type of agreement in the UK, the buyer and the Islamic bank jointly purchase the home. The buyer gradually buys out the bank’s share through monthly payments in the form of a monthly rent. As the buyer’s ownership increases, the rent paid to the bank (for its share of the property) decreases. Eventually, the buyer becomes the full owner of the property.
- Murabaha (Cost-Plus Sale)
Under this agreement, the bank buys the property on behalf of the customer and sells it to the customer at an agreed-upon profit margin. The customer repays the bank in instalments over time with no interest, just a transparent markup known in advance.
Considerations for future homebuyers
While Sharia-compliant mortgages provide an ethical alternative for Muslims, they may come with some trade-offs:
- Monthly payments can be higher than conventional mortgages, especially in the early years.
- Not all financial institutions offer these products, limiting availability.
Final Thoughts
While traditional mortgages conflict with Islamic prohibitions on riba (interest), Sharia-compliant alternatives like Ijara, Murabaha, and Musharaka provide viable paths to homeownership for Muslim consumers.
For specialist advice and support. Please get in touch with our corporate solicitors in London by contacting the GOOD LAW INTL office.
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