A brief guide to Islamic mortgages
This blog has been very caught up with the economic crisis and tentative recovery for a very long time now. However, I have decided to branch out a bit this week and look at an aspect of the UK mortgage market that is often ignored.
The first of these is the little known but fast growing field of Islamic finance, particularly mortgages. Until recently, mortgages were a religious obstacle to any Muslim who wanted to buy a home. Muslims must be sure that the mortgage complies with Sharia law. The biggest problem for a British Muslim who wants to buy a house is that either paying or charging of interest is prohibited.
Most UK mortgages involve the house-buyer borrowing the money and paying it back with some interest charged on top. This is of no use for Muslims. To avoid the issue of paying interest, Muslim mortgages usually involve the bank buying the property and then the buyer renting it from them over a length of time at a slightly increased price until they have paid the total price and take ownership themselves.
Muslim mortgages also involve making other aspects of the mortgage Sharia compliant, for example making sure that the money the banks use to buy the property comes from permissible sources.
Until July 2002 only one financial institution in the UK offered Islamic mortgages. The shortage of Muslim mortgages was due to both technical and cultural problems.Stamp duty was one of the biggest problems. Stamp duty is a one-off tax that is charged on every property sold. But stamp duty was being charged twice on Islamic mortgages because in a Muslim mortgage the property is in theory bought twice (once by the bank and once by the buyer).
Banking institutions also lacked knowledge not only of Sharia, but also of the Muslim community itself, and this probably held up the development of Sharia compliant products. All financial products for Muslims must be checked by a panel of Muslim scholars, and bankers were not used to working with religious experts and were unfamiliar with the language of the Koran.
The law on stamp duty has now been altered, double stamp duty was abolished on Islamic mortgages in April 2003, and the government began urging banks to work with Muslims. One of the first results came in July 2003 when HSBC, one of the biggest banks in the UK, brought out a range of Sharia-compliant mortgages. By the end of 2005 there were five banks offering Islamic mortgages, including Lloyds TSB and the Islamic Bank of Britain.
However, some problems do remain for those seeking Islamic alternatives to traditional mortgages. A big concern for Muslims is that they have to find more money in the beginning than usual borrowers. Sharia mortgages usually involve paying a large deposit, often around thirty percent of the total cost.
