Muslims seeking home loans aligned with their religious beliefs may face significantly higher interest rates compared to conventional mortgages.
Those desiring sharia-compliant loans may encounter rates of up to 9%, far exceeding the approximately 6% interest rates of standard mortgages.
This situation poses ethical dilemmas for many Muslims, according to Josh Rankin of Tembo, a broker specializing in both traditional and sharia options. “Despite their desire for sharia, many customers choose ‘regular’ mortgages,” he explains.
Islamic belief prohibits paying or receiving interest, making traditional mortgages non-compliant.
In response, sharia home financing deals have emerged in the form of sale and lease agreements. The bank buys the property on behalf of the customer, becoming the primary leaseholder or freeholder. These arrangements, often called “halal mortgages,” are actually no-interest home purchase plans (HPPs).
Under this structure, the customer leases or sub-leases the property from the bank and pays rent on the portion they do not own, gradually accumulating equity until they can fully purchase the property. While these plans resemble traditional mortgages, they substitute interest payments with rent.
However, such arrangements come at a high cost, requiring a substantial deposit and resulting in inflated lifetime prices for homes purchased through HPPs.
Gatehouse Bank, the primary Islamic bank offering residential home finance products, mandates a minimum 25% deposit. This means a £320,000 property would require an £80,000 deposit.
Monthly payments for a 25-year plan would range from £1,694 to £1,781, depending on the fixed term. This brings the total cost of the property to between £508,200 and £534,300.
By comparison, a traditional mortgage would cost around £1,100 per month at a 5.5% interest rate. Additionally, traditional mortgages allow borrowers to borrow more if they cannot raise the necessary deposit.
Mousir Syed, a business analyst attempting to purchase a property in London, encountered challenges with both Islamic banks and non-financial institutions offering HPPs due to strict criteria and legal complexities.
To address these issues, alternative options such as StrideUp and Wayhome, which provide similar principles with lower deposits of 15% and 5% respectively, have emerged but still come with higher costs than traditional mortgages.
The stringent criteria extend beyond affordability assessments to property approval, resulting in waiting lists and possible product withdrawals.
Despite the challenges, experts believe increased competition in the market will lead to more affordable prices and further options for interested buyers.
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