Islamic or Sharia-compliant mortgages are becoming increasingly popular across the globe, particularly in countries such as Qatar, Saudi Arabia and the UAE. Globally, Islamic finance now represents $2.4 trillion of assets, according to the Islamic Financial Services Industry Stability Report 2020. The UK accounts for $6.4billion of this, and there are approximately 3,000 residential and buy-to-let Islamic mortgages issued in the UK annually. It’s a lending area which continues to grow, and yet only a small number of banks offer these types of mortgages. More on where to find one later.
What are Islamic Mortgages?
The lending of money to make interest is not allowed under Islamic law as it’s considered haram (a sin). An Islamic mortgage is a form of Sharia lending, an alternative to a conventional mortgage for Muslims seeking a Sharia-compliant form of finance.
Whilst they’re referred to as mortgages, they’re technically ‘home purchase plans’, whereby a financial institution buys a property and then leases it back to you. These lending plans are still regulated by the Financial Conduct Authority however, so you’ll be protected like you would with other types of mortgages. And they’re not just available to Muslims, those who want to choose an Islamic mortgage for ethical reasons, can do so too.
It’s worth noting that this type of mortgage still comes at a cost. Islamic finance does recognise the time value of money within Sharia-compliant contracts, so you’ll still pay administrative fees and charges which are equivalent to the interest on a traditional mortgage and allow the lender to make a profit.
The good news is that the government’s Help to Buy mortgage guarantee scheme can also be used for home purchase plans like Islamic mortgages, making affordable home ownership more accessible for all.
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How do Islamic Mortgages work?
There are three options available: Ijara, Murabaha and Musharaka mortgages.
The Ijara mortgage is most popular as it’s more flexible. The Islamic lender purchases the property outright and you pay back the price of the property in fixed monthly instalments, usually over 25 years, as well as a monthly rental. The rental decreases each year in line with your repayment of the property price. Once fully paid, ownership of the property is transferred to you.
Murabaha mortgages are less popular as they require a large amount of capital at the outset (usually around 20%). The lender will buy the property for you and immediately resell it to you for a higher price. You pay the lender back the resale price in fixed instalments until you own it completely.
A Musharakah mortgage involves the buyer and lender entering into a partnership to jointly purchase a property. Both of you own a separate share of the property and your monthly repayments go toward repaying the lenders share, so your ownership share grows as theirs shrinks.
It’s not just mortgaging of course that need to be Sharia-compliant for the Muslim community. Business owners or investors looking for financing for their commercial projects such as bridging loans or development finance, will also require a specialist type of arrangement.
What are the Basic Rules of Musharakah?
Musharakah, rooted in Islamic finance, is a partnership model emphasising shared risk and reward. Partners contribute capital—cash or tangible assets—and profits are distributed based on a pre-agreed ratio, which need not align with capital contributions. Losses, however, are borne strictly in proportion to each partner’s investment.
No party can be guaranteed a fixed return, as this violates Shariah's prohibition of riba (interest). All activities must comply with Islamic law, avoiding prohibited sectors. Management rights are shared unless delegated. Musharakah ends through mutual consent or fulfilment of its purpose, with assets liquidated and proceeds distributed equitably.
Where can I source an Islamic Mortgage or other Sharia Financing?
Islamic mortgages can be harder to arrange than other mortgages because fewer lenders offer them. Finding a lender that can offer Sharia-compliant mortgages and other types of financing for high-net-worth individuals can be even trickier.
Enness Global have offices in Dubai and are very familiar with the lending process for Sharia-compliant financing, and the needs of high-net-worth individuals with complex wealth scenarios. We can leverage our extensive industry contacts and access to private banks and lenders to tailor financing to your specific circumstances, helping to make sure you get the best Sharia deal for your needs.
We recently secured £17 million of Sharia-compliant lending for Asian investors looking to refinance properties in their commercial portfolio. This was a very complex case whereby the clients’ assets were held in special purpose vehicles across three jurisdictions: China, Guernsey and the British Virgin Islands, and demonstrates our expertise in this specialist lending area.
As a broker with experience of dealing with high-net-worth clients from a variety of backgrounds across the globe, we’re well placed to deal with a wide range of non-typical lending scenarios. To find out more please get in touch.
The views and opinions expressed in this piece are those of the author and do not constitute advice or a recommendation. They do not necessarily reflect the official policy or position of Enness and are not intended to indicate any market or industry viewpoints, or those of other industry professionals
Islay Robinson, a founder of Enness, is widely regarded as one of the UK's leading mortgage brokers. He has been instrumental in delivering some of the most complex and high value mortgages in the UK.
