How to borrow under Sharia rules
Muslim homebuyers who want to stick closely to Sharia law cannot take out standard mortgage contracts, as they are not allowed to engage in an activity whereby money is made by charging interest.
A number of mortgage lenders in the UK do offer Sharia’a compliant methods of financing a property purchase.
There are three models of what are referered to as Home Purchase Plans (HPPs): Ijara, which means ‘lease’ in Arabic; Musharaka, which means ‘partnership’; and Murabaha, meaning ‘profit’. Each of three is slightly different.
An Ijara is a lease-to-own HPP. The bank or other provider buys the property you are after outright, and the rents it back to you. At the end of the agreed term the bank transfers ownership of the property to you.
Under a Musharaka plan, you and the bank buy the property jointly, then you gradually buy up more and more of the bank’s share. So if you put down 10 per cent of the purchase price, the bank will buy the remaining 90 per cent. You pay the bank monthly rent on the share you don’t own as well as buying more shares in the property with each monthly payment, with a view to owning the property outright at the end of the term. The more shares you own, the less rent you pay to the bank. The cost of a share in the property is based on the property’s original cost price, not its market value.
In a Murabaha plan, the bank will buy the property you want then immediately sell it on to you for a profit. You then pay fixed monthly repayments on the higher price, but with no interest to pay back to the bank. So the bank might buy a property that costs £200,000 and sell it on to a customer for £250,000; the customer then pays that sum back over a fixed term.