With many people from Muslim background, there is a lot of hesitation when it comes to buying their own property as paying interest is deemed as “Haram.” Depending how strict the family is, it may just decide not to buy unless it is a cash purchase, or they can obtain an “Islamic mortgage” per say.
Although the word Islamic is in the name, they are often referred to as Sharia Compliant Mortgages or Home Purchase Plans.
Many clients that I have seen have usually decided to go direct to an Islamic Bank and obtain a mortgage with very little understanding how they work. When they then decide to re-mortgage, sometimes’ they can’t.
So what is the difference?
With the Conventional Mortgages we usually have on the high street, you would put down a deposit on a property and the bank would lend you the rest. An example being, you buy a house for £100,000 and put down 20% deposit i.e. £20,000, the bank will lend you 80% of the property value i.e. £80,000. You would then have to pay £80,000 back as capital plus interest which is the interest rate the bank will charge on the product. This would be referred to as a repayment mortgage.
An Islamic Mortgage differs in the fact that the Islamic Bank would purchase the full 100% of the property value, making the property in the bank’s name although you would be a named party of interest on the deeds. The client would then be paying the Islamic bank “rent and acquisition” instead of “capital and interest.” Using the same example as above, if you put down a deposit of 20% on a £100,000 property, then you would be paying rent for living in the property until you are able to acquire the remaining 80% share of the property. This would be at a higher rate than a conventional mortgage as it ranges from 3.4% onwards.
Solicitor fees would also be higher as 2 solicitors are needed to work for the you and the bank charging two sets of legal fees as compared to one with conventional mortgages.
The one big issue can occur if you change your mind and decide to re-mortgage. If for whatever reason the property ends up in negative equity, as the bank is the owner until you have acquired the full 100% share, the bank can refuse to re-mortgage or hit you with a big penalty.
With Islamic Finance becoming a rapidly growing segment of financial services, my company Levana Finance is working with several Islamic Banks offering Islamic Mortgages. We are happy to advise and help people from our community and across the country in regards to Islamic mortgages.
Sadaf Khan Malik is a Yorkshire born and bred British Afghan mortgage broker, entrepreneur and founder of Levana Finance. She has worked with some of the leading mortgage brokerage firms in the country and has served clients ranging from major investment banks to high net worth individuals. Levana Finance is a member of Afghan Business Association UK.
Disclaimer: Your home may be repossessed if you do not keep up repayments on your mortgage. Not all products and services mentioned are regulated by the Financial Conduct Authority.
The views expressed by the author do not necessarily reflect the views and policies of the Afghan Council of Great Britain.