Sharia-compliant mortgages offer an alternative to traditional mortgages, functioning as property purchase plans that align with Islamic principles, which prohibit paying or receiving interest. While there are differences in how these mortgages work, they generally follow a similar structure: the financial institution purchases the property on your behalf and becomes the legal owner. Your monthly payments are structured like rent, with a portion going towards gradually acquiring the institution's stake in the property.
Types of Sharia-Compliant Mortgages
These are the main types of halal mortgage alternatives available in the market:
Diminishing Musharaka: The most popular Sharia-compliant home financing method, this is a joint purchase agreement between you and the bank. Over time, you buy out the bank's share of the property through monthly payments, increasing your ownership while the bank's diminishes until you own the property.
Ijara: In this home purchase plan, the bank buys the property and leases it to you. Your monthly payments consist of both rent for using the property and a contribution toward its eventual purchase. Ownership is transferred to you when all payments have been made.
Murabaha: Under this arrangement, the bank purchases the property and immediately sells it to you at a higher price, reflecting a profit margin. You then repay this amount in fixed installments over time.
Istisna: Primarily used for financing new construction, Istisna involves the bank financing the construction of a property, which is then sold to you at a pre-agreed price, similar to Murabaha. Payments are typically made in stages as the construction progresses.
Wakala: In this arrangement, the bank acts as an agent on your behalf to purchase the property. You pay the bank an agency fee, and the property is bought directly in your name.
Considerations and Risks
While these Islamic mortgage alternatives offer different benefits, it's crucial to evaluate the pros and cons of each to find the best option for your needs.
Financial Considerations: Even though the bank holds legal ownership of the property during the mortgage term, you are responsible for costs such as insurance, maintenance, conveyancing, and stamp duty. These costs are similar to those associated with a traditional mortgage.
Deposit Requirements: Typically, you will need a minimum deposit of around 25% to qualify for a Sharia-compliant mortgage. Additionally, budget for costs like surveys, building insurance, stamp duty, legal fees, and any broker fees.
Conclusion
Sharia-compliant mortgage alternatives are available at various banks, not just those specifically designated as Islamic banks. With a range of no-interest products on the market, it's important to understand all available options before making a decision.
Convici Capital has access to a wide array of Islamic mortgage products. We facilitate numerous transactions each year for clients worldwide, and particularly in the Middle East. If you're interested in discussing your options, please contact our team.