A Short Guide To Sharia Mortgages

Over the past few years, Islamic finance has gained increasing popularity as more Muslims are choosing to invest their money according to their religious beliefs. This is especially evident when it comes to home financing, where many Muslims are opting for mortgages that are Sharia-compliant.

In order to comply with Islamic law, these mortgages do not pay or receive interest (riba). In contrast, Sharia-compliant mortgages use alternative financing structures that allow Muslims to purchase homes without compromising their religious beliefs. Throughout this article, we’ll discuss how Sharia mortgages work, what they are, and why they are such an important option for Muslim home buyers.

What Is A Sharia Mortgage?

As a type of home financing, Sharia mortgages, also known as Sharia-compliant mortgages or Islamic mortgages, are a type of mortgage that adheres to Islamic law. The payment or receipt of interest (known as riba in Islamic law) is prohibited under Islamic law as it is considered usury. As a result of this, traditional mortgage products are not considered Sharia-compliant, since they charge interest on the amount borrowed.

It should be noted that Islamic banks and financial institutions offer a type of financing known as Murabaha to provide a Sharia-compliant alternative. As part of a Murabaha transaction, the bank purchases the property and then sells it to the buyer at a higher price, with the cost of the property being repaid over a set period of time. By using this method, the bank is able to earn a profit on the transaction without having to charge interest on it.

Another type of Sharia-compliant financing that is available is known as ijara. During an Ijara transaction, the bank purchases the property in question and then leases it to the buyer for a specified period of time, with the option to purchase the property at the end of the lease period. A portion of the purchase price in addition to the rent is included in the monthly payments made by the buyer.

As a result of the Sharia mortgages, Muslims can obtain a property with the help of these mortgages without breaking any of their religious beliefs.

Musharaka and Diminishing Musharaka

Musharaka is a partnership between the bank and the buyer that takes place in order to procure property. Both parties contribute funds towards the purchase of the property. There is a shared ownership of the property between the bank and the buyer.

There is a variation of Musharaka known as Diminishing Musharaka, which is also referred to as Declining Balance Co-ownership. Each party owns a share of the property in this type of financing, with the buyer gradually buying out the bank’s share over time. As opposed to Musharaka, the bank’s share decreases over time while the buyer’s share increases.

You should be aware that if you are considering applying for a Sharia mortgage, you may be subject to different eligibility criteria and requirements than you would for a traditional mortgage. As an example, the property has to meet certain criteria in order to be considered Sharia-compliant, such as the fact that it cannot be used for prohibited activities (such as the sale of alcohol). As well as this, Islamic mortgages may require a higher deposit and may have higher fees than traditional mortgages as well.

How Does A Sharia Mortgage Work?

There are a number of ways in which a Sharia mortgage differs from a traditional mortgage. An overview of how it typically works is as follows:

• An Islamic bank or financial institution offering Sharia-compliant home loan options is approached by the buyer once they identify the property they wish to purchase.
• A Shariah-compliant financing structure is agreed upon between the bank and the buyer. 
• Upon the agreement of the financing structure, the bank will buy the property on behalf of the buyer, using its own funds to do so.
• It is then the bank’s job to sell the property to the buyer at the agreed-upon price, which includes the cost of the property as well as the bank’s profit margin on the sale.
• According to the financing structure that has been agreed upon, the buyer pays the bank a set amount every month over a predetermined period of time. It is possible for the payments to be structured as either rent payments (in the case of an ijara), or as installment payments (in the case of a Murabaha).
• The buyer of the property takes full ownership of the property after he or she has made all the required payments.

If you found this article to be informative then why not read our guide to jointly owned property or considerations for transferring property to a limited company next?

Thandi Nicholls Ltd
Creative Industries Centre
Glaisher Drive
Wolverhampton
West Midlands
WV10 9TG