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About Islamic Mortgages
What are they?
There are approximately 2.5 million muslims in the UK, but many face
a dilemma when it comes to taking out a mortgage. For most people
the dilemma is how to get the best deal possible. For muslims it's
a question of do they go against their faith by taking out a conventional
mortgage or do they try and seek out a mortgage which complies with
their religious beliefs. Conventional mortgages are based on getting
a loan from a bank or building society for the price of the property,
then paying it back over a period of time, usually 25 years, at an
agreed rate of interest. Under the laws of Islam regarding investment,
Sharia, it is forbidden to take money when it has not been earned.
Money has to be produced through a muslims own effort and work. Interest,
(riba), is therefore viewed as an excess payment from one party to
another that is not related to the value of goods actually traded.
The result is that mortgage interest is not acceptable, as one party
profits at the other party's expense without there being any regard
to the price paid for the home.
The issue of paying interest is avoided in Sharia compliant
mortgages, as the bank involved buys the property initially. The buyer
then purchases it from the bank at a higher price and rents it for
the life of the mortgage. There are a growing number of younger muslims
who want to take out a Sharia compliant mortgage, but the choice of
mortgage lender is quite small. The main lender's are the Ahli
United Bank (formerly the United Bank of Kuwait), the West
Bromwich Building Society and the United National Bank.
The above offer two types of mortgages the Murabaha, which
is a deferred sale finance agreement and the Ijara, which is
a lease to own agreement.
How they work?
The paperwork involved for these mortgages is different to
conventional mortgages but its no more complex or time consuming.
The Murabaha mortgage is suitable for those who have a substantial
amount of capital to invest. This mortgage requires an initial payment
of 20% of the property's value on the day of purchase. The property
is registered in the buyers name immediately. The repayment period
is agreed between the lender and the borrower, usually 15 years. A
monthly repayment figure is calculated and fixed for the duration
of the mortgage.
When seeking a murabaha mortgage, the borrower finds a property and
agrees a sale price with the vendor. The lender, in effect, buys the
house by paying the asking price. The property will then immediately
be sold to the borrower at a higher price less the amount already
paid for the deposit.
The Ijara mortgage is a better option for many as a large deposit
is not required and it is more flexible than the Murabaha mortgage.
The monthly repayments are fixed on a yearly basis and the outstanding
balance can be paid off at any time, normally without incurring any
penalties.
When seeking an Ijara mortgage, the borrower finds a property and
agrees a sale price with the vendor. The lender will purchase the
property and takes ownership of it. The property is then sold to the
borrower for the original price, through a lease agreement, which
is spread over an agreed time period, usually 25 years. On top of
this, rent will also be payable on a monthly basis for the use of
the property. (The rent is considered fair payment for the use of
the property as opposed to an interest payment.) Once the lease period
has elapsed, ownership of the property is transferred to the borrower.
No more double stamp duty
Both mortgages attracted a double payment of stamp duty as the property
is, in effect sold twice. However since April 2003 double stamp duty
was abolished by the government on Islamic mortgages.
High Street banks and the future
To date the HSBC bank is the only bank that has launched its own sharia
compliant mortgage product called HSBC Amanah Home Finance.
Islamic and Conventional Mortgages Compared
Example of
an Islamic Mortgage
Example of a Coventional
Mortgage
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