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Many of our clients from the GCC region opt to take out a Sharia-Compliant mortgage when considering buying a property in London. This is an alternative financing option to traditional mortgages which involve interest rates. It allows homeownership and financing whilst adhering to religious principles for Muslim clients. In our guide, we delve deeper into the workings of Sharia-compliant mortgages. We have written this guide to help clarify how Sharia Compliant mortgages also known as Islamic mortgages work and can pave the route for your home ownership.

1 – What is a Sharia-Compliant mortgage?

Sharia-compliant mortgages offer a pathway to home ownership, they work similarly to a rent-to-own structure, however without incurring interest rates. In this arrangement, the bank will purchase the property on behalf of the buyer and will become the legal entity that holds ownership of the title. Therefore, the buyer will pay a rent to the bank, this rent will gradually go towards buying into the property, subsequently giving them legal ownership. The result is that by the end of the term, the buyer attains full ownership of the property, having completed the purchase through rental payments.

2 – Are There Different Types of Islamic Mortgage

Islamic financing gives buyers several alternative routes to traditional mortgages. Each is tailored to assist in achieving homeownership while upholding religious principles. Here, we outline three distinct alternatives within Islamic financing:

a: Ijara (rent-to-own)

Ijara operates under a simple rent-to-own structure. Monthly payments are split into rent as well as towards purchasing your share of the property. Therefore with each monthly payment, you build home ownership equity into your property. With each payment made, the buyer incrementally increases their share of ownership within the property.

b. Diminishing Musharaka – Diminishing Partnership Purchase

Diminishing Musharaka is theoretically a joint purchase between the buyer and the bank. The buyer and the bank enter into a joint purchase and co-own the property. Furthermore, the monthly payments will buy out the bank’s share of the property. Therefore as time goes by and more payments are made, the buyer holds a larger share of the property eventually by the end of the term buying out the bank.

c: Murabaha – Cost-Plus

Murabaha can be looked at as purchasing the property with a premium. The bank would purchase the property and theoretically be selling it to you at an agreed profit. Therefore your monthly payments are repayment installments of the bank purchase as well as the bank’s pre-agreed profit

It’s essential to carefully evaluate the potential advantages and drawbacks of each option before making a decision. This will ensure you choose the Sharia-compliant home purchase plan that best suits your financial goals and situation.

3 – Financial Responsibilities associated with Islamic Mortgage

While the bank may hold legal ownership of the property during the financing period, the ultimate homeowner remains responsible for ongoing costs, including property insurance, maintenance, upfront fees (such as legal fees and stamp duty), and monthly rental payments benchmarked on the LIBOR.

4 – Islamic Mortgage Deposit

There will be a downpayment requirement of 20-40% for an Islamic mortgage depending upon your eligibility. This will contribute to your initial ownership portion of the property value.

5 – Where to Find Sharia-Compliant Mortgage Providers:

Audley’s International offers guidance and assistance through our independent mortgage brokers, who can help you navigate your options for Islamic and Sharia-compliant mortgages.

6 – Financial Conduct Authority (FCA)

Rest assured, all Islamic mortgages are regulated by the Financial Conduct Authority (FCA), providing peace of mind regarding the safety and legitimacy of your property purchase.

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