Islamic mortgages are alternatives to standard mortgages on the market and were created to enable Muslim customers to buy real estate using faith based compliant finance products.
The most significant difference is that the loan is not a debt with Islamic Mortgage. Instead, it is a partnership between the borrower and the lender, sharing the profits or losses of the property.
They differ from traditional home loans in that you don’t pay interest as this is forbidden under Sharia law.
PRINCIPLES RELATING TO ISLAMIC MORTGAGES
The four main Islamic finance principles that apply to Islamic mortgages are:
RIBA
Riba refers to usury or interest and is strictly prohibited for Muslims as dictated by Sharia law. Islamic mortgages do not have any interest payment elements.
IJARA
An Ijara mortgage is similar to a rent-to-own scheme. The financier buys the property outright and rents it to you for a fixed term. Over this term you make regular steady payments, which are a combination of rent, repayment of capital, and profit for the financier. At the end of the agreement, ownership is transferred to you.
MUSHARAKAH
Musharaka refers to joint partnerships where you can make a decision with the bank to own separate shares in the property. As more and more monthly payments are made, thus the share owned by the bank is reduced until the homeowner owns the property outright.
MURABAHA
Murabaha is when the bank buys the whole of the property and sells it back to you for a higher price. The higher price is repaid in instalments and means that the bank can recover its costs, and the homeowner does not have to pay interest on the mortgage loan.
*various sources
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