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Receipt and payment of interest is prohibited under Islamic law, or Sharia. This forbids UK Muslims from buying a house using finance by an interest-paying mortgage loan. As necessity is the mother of invention, the UK mortgage market has solved this problem by introducing two innovative mortgage systems in compliance with Islamic law.

Both systems bypass the requirement of paying interest by paying an extra monthly amount in other form, which allows the lender to make a profit from the deal and the buyer to own a house by paying in easy installments. This is possible because under Islamic law it is not permitted to make profit by lending money, but you are allowed to charge money for providing goods or services.
The two main types of Islamic mortgage available in UK are the Ijara Mortgage, where the buyer leases to own, and the Murabaha Mortgage, where the lender resells the house to the borrower for a higher price than the cost of purchase.

Ijara Mortgages

This is the most common type of Islamic mortgage, popular and easy to pay. It is based on the Ijara principle, which states that when you pay Ijara, or rent, for a property for a long time, it becomes yours. In this mortgage system, when you decide upon buying a house, you contact your lender and he buys the house. You have two agreements with the lender which state that you will (a) pay back the purchase price in fixed monthly installments throughout the mortgage term, which is usually over 25 years; and (b) you also agree to pay a monthly rent which is set annually and decreases each year, with the gradual repayment of the original loan. So in effect, you take the house on lease and at the end of the term it is yours. You can borrow up to 90% of the purchase price.

Murabaha Mortgages

This method is less popular and more expensive. In this system your lender also buys the house, with you depositing around 20% of the purchase price. Then he resells the house to you for a higher price, which includes his profit. You repay the resale price in fixed installments; at the end of the term the house is yours. Mortgage terms are usually not more than 15 years, and you need a large initial deposit, which makes the system more expensive for you with a higher repayment amount.



Author Mohammed Zanidate added 2009-08-25 16:52:43

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