As most Muslims are aware, to charge interest is strictly forbidden in Islam - naturally, this presents a problem for those who are looking to buy a home.
Why? Because a standard mortgage will lend customers the money they require to purchase their home, and will also charge interest for the loan. Islamic mortgages are the better alternative as they do not charge interest, but how Shariah compliant can they be if a mortgage is still based upon interest?
A HOME PURCHASE PLAN
Instead of giving out loans and charging interest on them, Islamic banks will buy the property for you and sell it back to you at a higher cost — or they will lease the property to you and charge you rent. These options are popularly referred to as Sharia-compliant home purchase plans by most providers and customers.
Home purchase plans are just as secure as regular mortgages as they too are regulated by the Financial Conduct Authority (FCA). Also like regular mortgages, the purchase plans will be paid back by customers in suitable instalments. The banks are still making a profit, and the customer is not paying interest in return for a loan.
THE PROCESS
- Once you have found the property of your dreams, agree on a price with the seller and then you will look for financing.
- Find an Islamic bank that will provide you with an interest-free purchase plan so that they can purchase the property from the seller for you. (Here is where the difference between Islamic mortgages and conventional mortgages is stark: if you were to simply buy the property with the money the bank has loaned you directly, you would then have to pay interest on this loan.)
- The bank will sell the property back to you at a higher price (or lease it to you), and you pay this higher price back in instalments.
Although you are having to pay slightly more for an Islamic mortgage (compared to a conventional mortgage that charges interest), your contract is deemed to be Shariah compliant by relevant scholars.
We all realise the importance of being able to purchase a home for us and our family to live in, and an Islamic mortgage provides us with a halal solution.
We are hopeful that, in time, we will see even better halal solutions that enable us to purchase our home and not have to pay any amounts equivalent to interest — a real joint purchase/investment.
