Islamic mortgages

According to the Islamic law, Sharia, the Muslims are forbidden to pay or receive interest. Most of the mortgage products on the market thus were unsuitable for Muslim borrowers as these mortgages are mainly based on interest.

As a result of the increasing demand by the Muslim borrowers, lenders have in the recent years expanded their product ranges with Sharia compliant mortgages. Under Sharia law, two mortgage types are available to potential homeowners: Ijara (Lease To Own) and Murabaha (Deferred Sale Finance) loans.

The Ijara Loan

By this method, the mortgage lender would buy the property from the vendor; becoming the owner. The lender then leases the property to the over 20 to 25 years with a monthly lease payment. The lease payments would take all of the lender's costs into account.

Now the Muslim borrower's payment would now be treated as rent instead of "interest". And the payments would fluctuate with the interest rate changes.

The lease agreement would also specify that the occupier can buy the property off the lender for a very small sum, usually £1, at the end of the lease period.

The Murabaha Loan

By the Murabaha method, the mortgage lender purchases the property and immediately resells it to the Muslim borrower at a higher price.

The profit that the lender essentially makes out of this transaction is the equivalent of all the interest on a fixed interest loan as well as any costs incurred. The borrower then buys the property from the lender at that gross figure, which is then repaid to the lender in equal installments for a period, typically of 15 to 20 years.

Adil Akkus is the managing director of the Appleton Cookham Estate Agents.