Islamic Mortgage


How Islamic Mortgage Works? An example of how Islamic Mortgage Works

Suppose that there is a married Muslim couple with the surname Taj, who are looking for a house according to their Islamic faith.
Mortgages from British financial institutions are interest-based, something which does not comply with Islamic Sharia law. Islam has no objection to wealth creation, but says it must be based on partnerships and fairness where risks and rewards are shared.

In the eyes of Islamic scholars, interest is an excess payment from one party to another which is unrelated to the value of the goods traded.

Mortgage interest is therefore unacceptable because one party gains at the other's expense without any regard to the price paid for the home.
This means many Muslims in Britain find themselves in a difficult situation, trying to balance the core principles of Islamic equality with the realities of the British mortgage market.

In many cases Muslims conclude they have no choice but to reluctantly take out an interest mortgage - something Mr Taj's own parents did.

But Mr and Mrs Taj are among a growing number of young couples who want to turn to the two lenders in the UK offering Sharia compliant mortgages - the United Bank of Kuwait and the West Bromwich Building Society.
Once the Tajs find a house, the lender buys on their behalf and owns it outright.
Just as with an interest mortgage, the couple move in and begin paying instalments to the lender to slowly buy the home over many years.
But the difference is they also pay a rent to the lender who has effectively become their landlord.
The lender owns the property and receives a rent until the Tajs pay the final instalment.
In Islamic terms, the rent is not another name for interest: It is seen as a fair payment for use of the property rather than a charge for borrowing money.
There are a number of factors which make this more expensive than an interest mortgage. Firstly, the couple need a large deposit of 20% of the value of the home.
Secondly, because the process means the home legally changes hands twice, the Tajs will end up paying stamp duty twice, rather than once.
The couple have an added worry of trying to save enough to keep up with the rising London property market.
Hence, the borrower ends up paying more, but the Muslims who believe in their faith are prepared to pay more
So is there a demand for this type of mortgage?
"There's enormous interest in this subject among young Muslims. A lot of our friends are in the same situation," says Mr Taj.
"Some have managed to raise the money to take out an Islamic mortgage.
"A few of them have taken out interest mortgages because they feel it is the only choice they have, given the costs.
"I think they feel guilty about it but believed they had no alternative.
"It would make a real difference if there were more products on the market. Then there would be more choice for Muslims."

Link to Previous article : Home purchase plans and regulation - 2
This example is based upon a cast from BBC

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