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Sharia-Compliant Mortgages
Sharia-Compliant Mortgages Explained
For individuals looking to adhere to Islamic principles, Shariah-compliant mortgages offer a tailored solution. Unlike traditional mortgages, which involve paying or earning interest (Riba) prohibited under Islamic law, Shariah-compliant options work on alternative financial principles that focus on shared ownership, leasing, or profit-sharing.
BMI is ideally positioned to refer clients to Shariah-compliant mortgage providers. We do not directly offer financial advice.
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How do Sharia-Compliant Mortgages work?
Instead of borrowing money to purchase a property and repaying it with interest, Shariah-compliant mortgages involve a partnership between the buyer and the lender. The most common structures include:
Ijara (Lease to Own)
The lender purchases the property and leases it to the buyer over an agreed period. Once the lease term is complete and all payments are made, ownership transfers fully to the buyer.
Murabaha (Cost Plus)
The lender buys the property and sells it to the buyer at a pre-agreed profit margin, which the buyer repays in fixed installments
Diminishing Musharaka (Shared Ownership)
This involves joint ownership of the property between the lender and the buyer. The buyer gradually acquires the lender’s share over time while paying rent on the portion they do not yet own.
Key Benefits of Shariah-Compliant Mortgages
Three Benefits of Sharia Compliant Mortgages:
1
Ethical Financing
Designed to align with Islamic values by avoiding interest (Riba), excessive uncertainty (Gharar), and speculative investments.
2
Accessibility
Shariah-compliant mortgages are available to both Muslims and non-Muslims who prefer ethical finance alternatives.
3
Flexible Structures
With options like shared ownership or leasing, borrowers can choose a structure that best suits their financial situation.
Banking Options
Banks Offering Shariah-Compliant Mortgages
In the UK, several banks and financial institutions specialize in offering Shariah-compliant mortgages, including:
Al Rayan Bank
One of the UK’s leading Islamic banks, offering a wide range of home finance solutions based on Islamic principles.
UBL UK (United Bank Limited)
Offers Shariah-compliant home financing options with a focus on ethical banking practices.
Gatehouse Bank
Provides home purchase plans designed to comply with Shariah law, catering to both residential and buy-to-let properties.
Ahli United Bank (AUB UK)
Specializes in ethical and Shariah-compliant financial solutions for home buyers.
These banks are regulated by the UK’s financial authorities and ensure compliance with both Islamic and UK legal standards.
Challenges of Shariah-Compliant Mortgages
Limited Availability
Fewer lenders offer Shariah-compliant mortgages compared to traditional mortgages, which can make finding the right provider more challenging.
Higher Costs
Administrative, legal, and compliance costs may make Shariah-compliant mortgages slightly more expensive than conventional mortgages.
Complex Terms
The terminology and structure can sometimes be harder to understand for those unfamiliar with Islamic finance.
External Resources for Further Guidance
To explore the ethical and financial aspects of Shariah-compliant mortgages, check out these helpful tools and resources:
Risk vs. Reality Calculator
Understand the financial risks if you’re unable to work due to illness or injury. Click here to access the calculator.
Government Statutory Sick Pay (SSP) Information
Learn about government assistance available for employees who are unable to work due to illness. Click here for further information.
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How Bright Money Can Help
Navigating the world of Shariah-compliant mortgages can seem complex, but you don’t have to do it alone. At Bright Money, our experienced advisers understand the nuances of Islamic finance and can guide you through every step of the process. We work closely with leading Shariah-compliant mortgage providers, such as Al Rayan Bank and Gatehouse Bank, to help you find the best ethical and financial solution for your needs.
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Whether you’re purchasing your first home, refinancing, or expanding your property portfolio, we can help you achieve your goals while staying true to your values.
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Sharia
Compliant
Mortgages
What is a Sharia-compliant mortgage?
A Sharia-compliant mortgage is a home finance arrangement designed to comply with Islamic finance principles. Instead of charging interest, these products are structured using alternative models that involve shared ownership or asset-based financing, in line with Islamic law.
How does a Sharia-compliant mortgage work without interest?
Sharia-compliant mortgages avoid interest by using structures such as lease-to-own or purchase-and-resale arrangements. The provider may buy the property and sell or lease it to the customer at an agreed price, allowing repayments without charging interest.
Are Sharia-compliant mortgages regulated in the UK?
Yes. Sharia-compliant mortgages offered in the UK are regulated by the Financial Conduct Authority (FCA) in the same way as conventional mortgages. This ensures consumer protection and regulatory oversight.
Are Sharia-compliant mortgages ethical?
Many people consider Sharia-compliant mortgages to be ethical because they are designed to avoid interest and focus on transparency and shared risk. However, suitability depends on individual beliefs and financial circumstances.
Can first-time buyers get a Sharia-compliant mortgage?
Yes. Sharia-compliant mortgages can be used by first-time buyers, subject to lender criteria. Affordability, deposit size, and credit history are assessed in a similar way to conventional mortgages.
Can I use a Sharia-compliant mortgage to buy any property?
In most cases, Sharia-compliant mortgages can be used to purchase standard residential properties in the UK. The property must meet the provider’s criteria and be suitable security for the finance arrangement.
Are Sharia-compliant mortgages more expensive than traditional mortgages?
Costs can be comparable to traditional mortgages, but this depends on the provider, product structure, and market conditions. Charges are usually agreed upfront rather than expressed as interest.
Do Sharia-compliant mortgages require a deposit?
Yes. As with conventional mortgages, a deposit is usually required. The amount depends on the provider’s loan-to-value limits and the applicant’s financial profile.
Can I remortgage using a Sharia-compliant mortgage?
Yes, some providers allow remortgaging from a conventional mortgage to a Sharia-compliant mortgage, subject to criteria and property eligibility.
Are Sharia-compliant mortgages suitable for buy-to-let?
Most Sharia-compliant mortgages in the UK are designed for owner-occupied residential properties. Buy-to-let options are more limited and depend on provider availability.
