Muslims who want to secure a home loan in line with their religious beliefs face the prospect of paying much higher interest rates than if they took out a conventional mortgage.
Those who want a sharia-compliant loan are looking at up to 9% rates – far above the 6% interest that standard mortgages are hovering around.
This can result in thousands of pounds extra being added to the lifetime price of a home and has resulted in ethical dilemmas for many Muslims, says Josh Rankin of Tembo, a broker which deals in both sharia and traditional options. “This pushes many customers to opt for ‘regular’ mortgages, despite a wish to get sharia,” he says.
Sharia home financing deals exist in the form of a sale and lease agreement. Although sometimes described as ‘halal mortgages’, these are actually no-interest home purchase plans
Paying, or receiving, interest is not permissible in Islam, so that rules out a traditional mortgage for those who want to be fully compliant.
Sharia home financing deals exist in the form of a sale and lease agreement. To avoid paying interest, the bank buys the property with its customer as the freeholder – or primary leaseholder, if it is a long-lease property. Although sometimes described as “halal mortgages”, these are actually no-interest home purchase plans (HPPs).
Typically, the provider leases, or sub-leases, the property back to the homebuyer, who then pays rent on the part they do not own, plus increments towards buying the property.
Structures differ, but the cash deposit and subsequent payments are legally presented in a partnership agreement.
The rent payable reduces after a specified period as the buyer’s equity stake grows. Broadly, it is similar to a traditional mortgage in structure, but with the interest payments replaced by rent.
However, the costs of such arrrangements are high, and Muslim buyers who take out one of these agreements need a large deposit.
Gatehouse Bank, currently the main Islamic bank offering residential home finance products, requires a minimum 25% deposit. That means on a property costing £320,000 you would need £80,000 to put down.
Monthly payments on a 25-year product would be between £1,694 and £1,781, depending on how long it is fixed for, taking the total cost of the property up to between £508,200 and £534,300.
In contrast, if you took out a traditional mortgage on the same terms, you could pay around £1,100 a month at 5.5%. And if you could not raise the deposit, you could borrow more, subject to earnings.
Mohammed Saqub, head of Islamic finance at law firm Shakespeare Martineau, says the reason for the higher rates is that, for lenders, funding this type of scheme is more expensive.
“If you’re a high street bank, you’ve got depositors with funds in the billions, and it’s a completely different ballgame to a relatively new Islamic bank where the depositors aren’t significant,” he says.
“To attract those depositors, you have to pay quite high rates.”
Criteria are incredibly strict. Not only does the buyer have to pass affordability tests, but the property has to be approved, tooJosh Rankin at broker Tembo
HPPs from non-financial institutions, with regulatory approval from the Financial Conduct Authority, also offer an alternative for Muslim buyers as the principles are the same.
These include StrideUp and Wayhome, which allow lower deposits at 15% and 5%, respectively, but are also more expensive than traditional mortgages.
StrideUp estimates show monthly payments at about £1,750 on the same £320,000 property over 25 years.
Even if you get past the financial hurdles, there are strict criteria on the type of property which can be bought, whether you opt for an HPP from an Islamic bank or a non-financial institution. Waiting lists or product withdrawals add further obstacles.
“Criteria are incredibly strict,” says Rankin. “Not only does the buyer have to pass affordability tests, but the property has to be approved, too.”
The company running the scheme might not finance certain homes – high-rises may be problematic, as could shared ownership.
Mousir Syed, 40, a business analyst who is trying to buy in London, wanted a flat in a deal that involved a lease extension, but it did not work out. “With Islamic finance, the legal part takes a lot longer than if you’re buying a traditional mortgage. And it fell through,” he says.
The seller wanted to start a process which would allow Syed, as the buyer, to complete the extension process. However, as the lender was also the leaseholder, the additional time involved in the process meant they would not have met the required deadline. Syed tried to negotiate a lower sale price to reflect the shorter lease, but an agreement could not be reached.
He found another property – this time with ownership as a share of freehold – and turned to Al Rayan, the UK’s largest Islamic bank. But because of the different financial arrangements to conventional mortgages, the other freeholders, who were not Muslim, questioned whether the bank could be a freeholder, or whether there could be a separate leaseholder on the property.
They were also worried about any wider implications when they wanted to sell, says Syed.
He directed them to specialist solicitors to answer and clarify their queries, but the delay frustrated the seller, who pulled out.
Syed considered non-bank HPPs but decided it made more sense to keep renting – riding out the high interest rates, which still affect the Islamic finance market, or waiting until property prices drop further to even out costs.
However, he still will not consider a traditional mortgage.
“I don’t feel good about going that way. I understand some of these alternatives aren’t perfectly sharia, but they’re the closest thing we’ve got until we have something better,” he says.
Tembo says the high rates it sees in sharia-compliant options suggest the community is underserved.
More competition in the space would drive down prices, says Saqub. “As the uptake of the regulatory approval increases, the hope is that there’ll be more competition and more providers.”
