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Islamic Mortgages

We specialise in Sharia Compliant Mortgages. We provide islamic mortgages to enable the purchase or refinance of a property within Islamic law for residential or buy-to-let.


How an Islamic Mortgage is different:

The purpose of Islamic finance, as found in practice, is to replicate the economics of conventional mortgages, while remaining compliant with Shariah.

It would also be possible to devise Shariah compliant property finance contracts that had different
economics, for example by having the Islamic bank share in any increase in value of the property, but
such contracts are uncommon for reasons connected with the bank’s risk management and also due
to customer demands. Such alternative contracts are beyond the scope of this simple introduction.

There are two main options for islamic mortgages:

1. Property Finance using a Murabaha contract

2. Property Finance using a diminishing Musharaka contract


Property Finance using a Murabaha contract:


Assume that a property whose price from the third party is £500,000 is to be purchased on with Shariah compliant finance. The Islamic bank will buy the property for £500,000 having pre-agreed with the customer that the customer will then buy the property from the Islamic bank at a pre-agreed price, on pre-agreed payment terms. The Islamic bank may offer finance to the customer on the following terms:

 Cost of property from third party £500,000
 Term of finance  25 years
 Islamic bank will purchase the property and immediately resell it to the customer for a fixed price. £790,182
 Part of price payable by customer on day one £125,000
 Balance of price to be paid in 25 equal installments  £6665,182
 Frequency of customer installments  Once a year on the anniversary of the initial purchase

Property Finance using a diminishing Musharaka Contract:

Under a diminishing musharaka contract, the customer and the Islamic bank purchase the property jointly under a musharaka contract, loosely a partnership contract as understood by Shariah law. The customer will have exclusive occupation, and will pay the Islamic bank rent on that part of the property which is owned by the Islamic bank. The transaction is called diminishing musharaka because the partnership shrinks as the customer buys out the bank and ends once the buyout process is completed.

 Cost of property from third party £500,000
 Term of finance 25 years
 Customer to initially purchase 25%, costing £125,000 of the customer's own money
 Bank to purchase 75%, costing £375,000 of the bank's money
 Rent Calculation Rent to be calculated by multiplying the original cost of the part of the property owned by the bank by the XYZ Building Society's standard variable interest rate, currently 5%
 Rental rate adjustment dates The rate can only be adjusted at the end of each year.
 Frequency of customer payments Once a year on the anniversary of the purchase from the third party.
 Price at which the customer will buy out the bank Price equal to the original cost to the bank.
 Customer to make equal annual payments comprising both rent and part payments to acquire the bank's share of the property.

As explained above, the pricing for Islamic property finance is based upon prevailing market interest rates for conventional finance. That is inevitable in an economy where money can flow between the two sectors; having a price for “Islamic money” that was different from the price for “conventional money” would simply create arbitrage opportunities that would damage the Islamic finance sector. In practice, Islamic property finance is usually more expensive than conventional property finance, even though both are based upon the same market price for money. There are two basic reasons for this:


1. Islamic banks are typically much smaller than conventional banks. Accordingly they lack the economies of scale that allow the conventional bank to reduce their non-interest costs such as staff and technology costs to the bare minimum.
2. Islamic finance typically has more transactions than conventional finance to achieve the same goal. This can be seen from the above examples. It also has other costs, for example the costs of the Shariah supervisory board. All of these extra costs have to be passed on to the customers of Islamic banks.

Please speak to one of our advisors today to enquire more about islamic mortgages.

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