Riba is an Islamic term often used to describe interest or excessive earnings gained from the reimbursement of a loan which enriches the Lender. In many religious societies, interest, or usury, is frowned upon as they exploit the Borrower’s finances.
As for those who devour interest, they behave as the one whom Satan has confounded with his touch. Seized in this state they say: “Buying and selling is but a kind of interest,” even though Allah has made buying and selling lawful, and interest unlawful. – Quran (2:275)
And if you lend to those from whom you expect repayment, what credit is that to you? Even sinners lend to sinners, expecting to be repaid in full. 35 But love your enemies, do good to them, and lend to them without expecting to get anything back. – The Holy Bible (Luke 6: 34-35)
What is an Islamic mortgage?
An Islamic mortgage, is very different to a regular mortgage. When obtaining a regular mortgage, an interest rate will be agreed between you and your Lender. However, when obtaining an Islamic mortgage, your Lender will purchase the property for you, selling it back to you at an increased value. Payments will be made in instalments, just like a normal mortgage, but no interest will be added to your loan amount.
In Islam, money is an element, a thing. which should not possess an intrinsic value. If the loan accumulates an interest amount determined by the Lender, this suggest that the money holds an intrinsic value which is forbidden. This can sometimes make it difficult for Muslims to purchase properties.
How do Islamic mortgages work?
When obtaining a loan from a regular Lender, the bank will transfer you the money to pay the vendor. You will then pay the bank back with an additional interest rate.
When obtaining an Islamic mortgage, the Lender will buy the property from the Vendor, consequently owning the property. You will then purchase the property directly from the bank for a higher price. This allows the Lender to profit from the transaction without charging you interest on your loan. Sharia-compliant products such as Home Purchase Plans (HPP) and Buy to Let Purchase Plans (BTLPP) do not involve interest charges and are based on joint ownership between you and your Lender. As each monthly instalment is made, your shares in the property increase, allowing you to own the property outright once you have paid back your full loan amount.
Whilst you do not pay any interest when purchasing a property from the bank, if you are to lease or have a rental agreement with your Lender, the rate could fluctuate as this is dependent on the market rental rate at that time. The BTLPP is a more inexpensive purchase plan which allows you to make enough instalments to cover the rent amount only. This does however, not allow you to purchase any shares. At the end of your loan term, you will have to prepare to purchase your Lender’s share.
Do you have to pay Stamp Duty Land Tax?
Ijara is a lease of an item by its owner to a customer and Ijara wa Iqtina is a lease of an item usually followed by the eventual sale of the item to the customer at the end of the lease term. In the case of a property purchase using Ijara wa Iqtina, the bank will purchase the property chosen by its customer for an agreed price and then will grant a lease to the customer.
Provided the statutory conditions are fulfilled the lease, the transfer of the reversion and any intermediate transfers of shares in the freehold are relieved from Stamp Duty Land Tax, as is the initial transfer if the customer is the registered proprietor.
For more information, please visit https://www.gov.uk/government/publications/islamic-financing/practice-guide-69-islamic-financing.
What are the benefits of obtaining an Islamic mortgage?
The primary benefit of an Islamic mortgage is that the Lender undertakes a significant risk. Regardless of if the economy or interest rates are to alter, they are not allowed to change the amount agreed to buy the property from them.
What are the potential risks?
If you are to obtain a leasing agreement and agree to pay rent instead of buying the property back, the rent could increase or decrease. This is dependent on the rental market prices at the current time. Lenders usually do, however, have a fixed rate as a preliminary proposal for rent and lease agreements.
What factors should you consider?
You should list all costs involved in obtaining a standard mortgage and liken them to the fees involved in comparison to an Islamic mortgage. Make sure you equate which will cost you more in order to calculate any savings.