FISCUS MORTGAGES - INFORMATION AND ADVICE

Islamic Mortgage

Conventional UK mortgages are irreconcilable with the beliefs of Muslims that adhere strictly to Islamic Sha’ria law. The religious laws have no problem with an individual that is deemed to charge a fair price (and thus profit) for providing a good or service. The problem stems from the payment of interest. In the eyes of Islamic scholars it is considered an excess payment, and as it is unrelated to the intrinsic value of the product being exchanged, is objectionable for those that closely follow Islamic law.

With a large and growing Muslim population in the UK, some lenders have decided to enter this burgeoning marketplace. The United Bank of Kuwait and the West Bromwich Building Society (supplied by Ahli Bank) were the first two lenders in this country to offer mortgages that are compatible with Sha’ria law, with HSBC recently becoming the first of the big banks to offer an Islamic mortgage, under the brand name HSBC Amanah Finance.

HOW AN ISLAMIC MORTGAGE WORKS

The principle is simple and revolves around the removal of interest from mortgage payments. The financial institution buys the property in question. They then allow the borrower to repay the capital over a fixed term (similar to normal mortgage terms of around 25 years), while charging the borrower rent to live in the bank’s property. Monthly repayments thus revolve around paying capital and rent, rather than capital and interest.

This idea complies with Sha’ria, as there are no issues arising from a renter charging a fee for the occupation of their property. There are a few variations on the scheme, but all revolve around the bank or building society first buying the house, then selling it on to the client.

COST INVOLVED IN SHA’RIA COMPLIANT MORTGAGES

One of the greatest problems involved with Islamic mortgages, was the tax implication of the house being bought twice; once by the bank and then once by the mortgage holder. This led to the need to pay stamp duty twice, and this cost was passed onto the final homeowner, pushing the costs up and making an Islamic mortgage prohibitively expensive for some.

However this stumbling block has now been removed, with Gordon Brown announcing the change in last year’s budget speech. The Council of Mortgage Lenders released a statement at the time, explaining the abolition of double stamp duty on Islamic mortgages.

However, despite the entrance of HSBC to the Sha’ria compatible mortgage market, there is still a dearth of choice available for UK consumers (the mortgages are open to Muslims and non-Muslims alike). This lack of competition has seen these products charged at a premium to the interest-based mortgages on the market.

Alongside this, many of these mortgages require a much larger deposit than a typical home loan, typically 20% of the value of the price. With the increase in house prices over the years, it can be an acute problem for first-time buyers that wish to take out an Islamic mortgage.

As with all financial products, we suggest you speak with a trained professional before making your final decision. Please fill out our quick enquiry form and we will arrange contact with an Independent Financial Adviser (IFA) within 24 hours.