What makes an Islamic Mortgage Halal?

The primary reason why many scholars believe Islamic mortgages are halal is that they are a partnership-based model rather than an interest-based loan.

Our view at IFG is that Islamic mortgages that are available in the UK are halal and a great solution for now, but there are improvements that can be made.

What Makes a Standard Loan Haram?

Under a conventional mortgage, most people take out what are called repayment mortgages. This is where every month you pay the bank both:

1. Interest, and
2. Part of the capital (i.e. the money you borrowed).

You’re paying interest – exchanging money for money. This is a major sin in Islam.

• Shaykh Haitham Al-Haddad views them as haram.
• IslamQA – considers conventional mortgage as haram.
• Mufti Muhammad ibn Adam – also agrees.

You can find other arguments on our forum thread on this topic here.

But some say conventional mortgages are halal

There are significantly fewer scholars in this camp. The most prominent and recent amount them from the UK is Shaykh Atabek Shukurov. He argues here and here that conventional mortgages should not be understood as the classic riba-based debt in Islamic law.

We at IFG respectfully disagree. You can read about this here.

Summary

You can’t justify getting a conventional mortgage by saying “it is a necessity for me to buy a house and the cheapest way is a conventional mortgage”. Two reasons why:

1. because it’s not really a necessity; and
2. you can always go for an Islamic mortgage instead.

Secondly, you can’t justify getting a conventional mortgage by arguing that it is essentially just like a murabaha transaction. This mischaracterises conventional finance and would open the floodgates to basically rendering large swathes of conventional finance as halal.

Finally, it’s not ok to get a conventional mortgage if you can’t afford an Islamic one. Mortgages are almost always haram – read more here.

What Makes an Islamic Mortgage Halal?

An Islamic mortgage is structured as a Home Purchase Plan (HPP). This is so you avoid paying interest.

There are three types of HPPs:

1. Ijara aka “rent-only” (lease),
2. Diminishing Musharaka (partnership) and
3. Murabaha (profit).

We’ve written a lot about these three HPP’s here. But find a short summary below:

Ijara

The bank purchases the property you want to buy and leases it to you for a fixed term, at an agreed monthly cost. When the term is over, full ownership of the property will be transferred to you.

Diminishing Musharaka

• The most common method for residential mortgages
• It’s a co-ownership agreement
• The bank will own most of the house (e.g. 80% of it) and you’ll continue to pay ‘rent’, buying further equity, until you have 100% ownership. Your share of ownership grows and theirs shrinks.
• What makes this halal? The bank shares the risk of ownership with you. In other words, the bank is holding 80% of a property on its accounts, rather than an £80k debt

Murabaha

• The bank buys the property and sells it to you at a marked-up price which you pay in monthly instalments. These kinds of agreements are rarely seen for UK home purchases but are sometimes used in commercial property development.

Are Islamic mortgages perfect?

Absolutely not. We’ve written about this a lot, like here.

1. Not all scholars approve of HPP
   • e.g. Shaykh Haitham Al-Haddad – whenever there are senior scholars who disagree with a view it should give some pause for thought. Ultimately we incline more to the other body of scholars in this argument but it is of course better if there were a consensus home purchase product.
2. They don’t share in ownership risk fully.
3. Fractional reserve banking and money creation – IFG has found Islamic banks do the same.
4. Banks use base-rate-pegged values to set your rent, rather than using average levels in your local area as a guide. Ultimately though this makes Islamic mortgages more affordable.

And to conclude

If you’re genuinely want to stay away from riba when it comes to buying a home, an Islamic mortgage is your best option today. You can compare between the available Islamic banks here.

However, we need to:

1. Campaign and lobby Islamic banks to sort out the issues they have.
2. Campaign to stop money creation by private banks, move towards a full (or at least fuller) reserve banking system, and empower politicians to do this. Educate the Muslim community on these areas and get more Muslims in the industry to bring positive change.
3. Come up with our own financial institutions – particularly for halal business loans – that truly are as Islamic as possible given our current financial system.