SHARIAH COMPLIANT MORTGAGES
SHARIAH COMPLIANT MORTGAGES
Hectocorn is determined to find the right financial solution for all our clients, regardless of their background, culture or faith. And Shariah-compliant mortgages, also known as Halal mortgages, are a crucial tool in our offering for Islamic ultra-high-net-worth individuals.
The principles of Shariah are centred around the fact that money shouldn’t have value in itself. Therefore, wealth generation should benefit the community as a whole, rather than a single person. This means that any financial agreements should adhere to specific conditions, be fully transparent and fairly share risk and reward.
Some critical aspects of the Shariah principles when it comes to Islamic faith-compliant mortgages include:
- Shariah-compliant finance: Financial agreements cannot be used to support trades that go against Shariah law, including goods like alcohol, tobacco, gambling, or weapons.
- No interest profiting: Paying or receiving interest – which constitutes making money from money – is strictly forbidden. Instead, the funds should be used for a good cause, such as generating profit supported by genuine trade or business activities.
Under Shariah law, interest cannot be charged or paid on loans or mortgages. So a Shariah-compliant mortgage is designed to prevent the buyer from paying interest on a property. Rather than paying interest rates, Islamic banks will deal with “expected profit rates.”
Many UK-based and International banks and lenders are Shariah-compliant, not just specifically Islamic banks. Although initially developed for Muslims, this type of finance has become increasingly popular with the non-Muslim community and has become known as ethical lending with borrowers of all faiths.
Shariah-compliant finance and home purchase plans (HPPs) are considered a more ethical and competitive way to purchase a home. Rather than a homeowner purchasing a property in their name, the bank or lender buys it on their behalf and their monthly payments function more like rent. A portion of that money goes towards buying out the bank’s stake and the lender doesn’t charge interest, as this is prohibited by Islamic law.
Shariah-compliant finance typically involves early repayment charges (ERC) if homeowners want to pay off the entire amount and end their agreement early. This can be an appealing solution for homeowners with uncertain short-term plans, such as those needing to sell their property in the near future.
Landlords looking for shariah-compliant finance to expand their property portfolio can use a buy-to-let purchase plan (BTLPP). This is similar to an HPP, but is an ethical alternative to a standard buy-to-let mortgage. In addition, there are no early payment charges on a BTLPP, excluding legal charges. As with residential finance, ERCs aren’t applicable for BTLPPs, even for people in the middle of a fixed-term agreement. This can also be an attractive deal for landlords facing the uncertainties of expanding their portfolio, but it’s worth noting that securing this type of finance may require specialist solicitors.
Shariah-compliant mortgages rely on four core Islamic principles and financial structures that enable Muslim homeowners to purchase properties:
- RIBA: A fundamental Shariah principle is that RIBA is strictly prohibited for Muslims under Shariah law. RIBA refers to the interest charged on loans, so Islamic mortgages work on the basis of not having any interest payment elements.
- Ijara: An Islamic financing structure allows the bank that finances a property purchase to lease it to them for a fixed monthly payment.
- Acquisition diminishing Musharaka: A joint partnership between homeowners and their bank. As more monthly payments are made, the bank’s share in the property is reduced until the applicant owns it outright.
- Rent-only diminishing Musharaka: Similar to the above Musharaka agreement, the homeowner and bank both contribute to the purchase or refinance of a property. However, the repayments only serve as rent, so property ownership remains consistent throughout. The mortgage applicant can increase their monthly payments to buy out more of the bank’s share or agree to make a lump sum payment to boost the percentage of the property they own.
- Murabaha: An agreement that sees the bank purchase an entire property and then sells it back to the homeowner at a higher price. The property purchase is repaid in instalments, allowing the bank to recover costs and ensuring the homeowner doesn’t pay interest. This agreement can incur higher charges as the property is likely to have increased in value by the end of the term. Such agreements are unusual in the UK, but are seen more commonly in commercial deals.
A Shariah-compliant mortgage typically requires a minimum of 10% to 20% upfront deposit to qualify. As many options are available, it’s best to consult an experienced mortgage broker to determine the best solution for your specific requirements.
Shariah mortgage applicants may also require an additional budget for building insurance and legal costs. As of 2022, the UK government instructed that stamp duty tax on Shariah-compliant finance should be paid once at the beginning of the agreement.
When it comes to high-value loans, many high-street lenders are unwilling to compromise on mortgage terms. This is where it’s vital to speak to a finance brokerage with proven experience in dealing with Shariah-compliant mortgages. It’s also worth considering that Shariah-compliant finance can be more expensive than dealing with challenger banks and other mortgages, as the bank or lender may have to cover higher admin costs.
Hectocorn’s established relationships with niche lenders specialising in Islamic finance and Shariah-compliant mortgages ensure we can negotiate the best ethical deals for Muslim and non-Muslim clients. We put your needs at the centre of our process, considering your faith or culture-related circumstances and gaining the best rates and terms for your financial situation.
Our experience negotiating Shariah-compliant mortgages ensures we can guide you through the process no matter how complex your circumstances. We also have extensive expertise in helping portfolio landlords under limited companies or special purpose vehicles (SPVs) secure shariah-compliant finance. So whatever your circumstances, we can assist you in securing Shariah-compliant finance.