Islamic Mortgages
A burgeoning demand for what are known as Islamic mortgages (also known as Halal mortages) is making an demonstrable impact in the mortgage market in certain parts of the UK. The value of this sector has increased from £40 million in 2002 to an anticipated £1.4 billion by 2009, according to research from Datamonitor .The opportunity for the UK’s 1.8 million Muslims to obtain Shariah-compliant mortgage finance from High Street banks and other financial institutions has also led to a increased demand for property in areas with high Muslim populations. Examples are London, with 725,000 Muslims out of a total population of 7.2 million and Leicester with 55,000 Muslims from a population of 280,000.
One result is property price inflation in these areas: in the Highfields area of Leicester, for instance, a three-bedroom terraced house that could have been bought for about £60,000 in 2000, at the beginning of 2007 was on selling for over £120,000.
Type of Islamic mortgage: In the UK, most Islamic mortgages are raised using the ijara, musharaka or murabaha models:
- For an ijara mortgage, the potential purchaser agrees a price with the vendor. The purchaser's Islamic mortgage provider negotiates a “Promise to Purchase” agreement with its client and buys he property at the agreed price on behalf of the client. Along with this agreement is a lease that defines the occupancy rights for the property. The lender’s client - the purchaser in normal parlance - makes regular repayments to the financial institution that incorporates rent and partial repayment of capital. When the purchase price has been paid back in full, rental payments cease and title to the property is passed from the financial institution to the occupier. By structuring the mortgage in this way, payment of interest is avoided and the Shariah law is not infringed by either party*.
- The musharaka or shared ownership mortgage, is similar in that the purchaser agrees a price with the seller. The mortgage lender then purchases the property on behalf of its client. However, the client's first capital repayment (as part of the regular monthly repayments) to the lender becomes their first share (albeit a small one) in the property. The proportion of the property owned by the purchaser increases over time as the repayments continue; once the mortgage is repaid in full, total ownership of the property passes to the client. Again, no interest is paid, strictly speaking, so the agreement stays within the Shariah law.
- For a murabaha mortgage, a purchase price is agreed and the lender purchases the property on its client’s behalf. It then sells the property back to their client at a higher price (cost price plus agreed profit). There is usually a down payment of 20% and the repayments depend on the length of the mortgage term and the anticipated return on investment for the lender.
Until April 2003, Stamp Duty had to be paid twice over on Islamic mortgages - once when the financial institution purchased the property and again when the property was transferred to the client. This process has to be carried to be permissible (Halal) under Shariah rules. The law was changed and the big institutions, including HSBC and Lloyds TSB entered the Islamic mortgage market.
* Payment of mortgage interest is seen as an uneven transaction where benefits are not shared equally (one party pays, the other receives) so falls foul of Shariah law. However, defining exactly what constitutes riba (usury) is a complex task, involving panels of Islamic scholars who developed new Shariah-compliant mortgage products.
