Are Mortgages Haram? Understanding Mortgages and Islamic Law

Very few people are in the fortunate position of having access to enough ready cash to buy a property without resorting to applying for a home loan. Fortunately, banks and building societies provide a huge range of loan options for people who need that extra financial help. For most people, exploring the options for purchasing a property is complex. However, one group of people arguably has an even greater challenge to consider. Muslims buying their own home is not as simple as it may first appear. While many people following other religions will simply explore the market to see what is available, the same option is not available to Muslims. In the title, we asked if mortgages are haram. Haram means forbidden according to Islamic law. Here, you can find out more about how a mortgage is viewed by Islamic law and discover ways in which Muslims can buy property without flouting that law.  Islamic law is otherwise known as Sharia law. This law prohibits a Muslim from profiting from a financial exchange with someone else. This works both ways. For example, if a Muslim lent money to someone else, they could not charge interest for doing so. Similarly, they should not receive any benefit from borrowing money from someone else. Interest is known and referred to as riba in Islamic terms. The rules against earning interest apply in all situations. You may be lending money to another individual – perhaps a friend or a family member. Similarly, you may be borrowing money from an organisation – a bank or building society, for example. In each case, no interest can be charged or received by either party. If it is, the arrangement is deemed to be haram, i.e. it is forbidden under the terms of Islamic law.  With this knowledge, we can see that most UK home loans will not be permissible under Sharia law. Since the banks and building societies charge interest in return for making the loan available, a Muslim cannot apply for one of these loans without breaking their recognised laws. Since most people go down this familiar and well-worn route, how can Muslims ever hope to own their own property? While some might fortunate enough to have the available cash to buy their own home although,  this is an unlikely proposition for most. The solution is to find a bank or building society that provides Islamic mortgages for Muslims. While the product is often referred to by the same term it is in the general marketplace, it is a very different product compared to the loans we are more familiar with. It’s one of the reasons why very few companies offer a deal that does not break any element of Islamic law. Only those with knowledge and experience of the religion and its requirements are likely to provide products that are approved in this sense. Let’s look at a few examples of how a Muslim could buy their own property by seeking out a suitable loan from a Sharia-compliant bank or building society. In theory, an individual could borrow the amount they require interest-free, but of course that is unlikely to happen. Lenders always make money from loaning money to people, and they will not change that in this scenario. Lending hundreds of thousands of pounds to someone without any profit on the deal would be unthinkable from the lender’s point of view.   Aside from the impractical idea of getting an interest-free loan (something we would all appreciate), there are a couple of other solutions to this issue. The first solution would involve the lender purchasing the applicant’s desired property. The lender then agrees to re-sell the property to the borrower at a profit. This agreement is a leasing solution known as Ijara. The payments for the property will be amortised in this situation. It means the bank will end up making the same amount of profit it would have achieved if a regular mortgage had been granted. However, the applicant will not be paying interest on the loan, so the solution does adhere to Sharia law by removing the need for interest payments. Another option would see the lender and the applicant enter into an agreement to own the property together. (A similar agreement can also be reached in business, where the two own the business together.) Here, the applicant will make regular payments to the lender in rent, so that they will eventually own the whole property, just as they would if they had a mortgage and paid it off in full. This option is known as Diminishing Musharaka. As you can see, there are differences here when comparing the scenario to the mortgaging of a property. However, the result is the same – allowing Muslims the chance to own their own homes while still adhering to the laws of their religion.  Firstly, very few banks offer loans that are arranged in accordance with Muslim law. Banks and building societies wish to make a profit on their transactions. It’s why they pay less in interest on savings and charge more in interest on loans. If you are a Muslim looking to buy your own property, you must search for lenders who offer products in line with Sharia law. You can search for these online or ask for recommendations in your community. Secondly, regardless of the type of agreement you opt for, you will always need a deposit to put down against your chosen property. This may vary depending on the lender. There are plans that offer to meet between 60% and 95% of the total cost of your property. If you wish to look at buying your own home, search for home purchase plans (otherwise known as HPPs). These will give you approved solutions for home ownership that should be ideal for your situation.  Muslims in the UK have far fewer options when looking to get financial assistance to help them buy a property. However, some lenders are specialising in home purchase plans. By researching the marketplace, just as any future homeowner would, you can determine which products are suitable and compliant with Sharia law.