We’re all aware that interest (riba) is unlawful and strictly forbidden within Islam.

But I’m wondering if that is the case, how does one go about purchasing a property in the West? One cannot save money to buy a property outright, unless you’ve been saving since you were in your nappies. Or your parents are wealthy and help with the transaction.

Therefore people resort to taking out mortgages, whether they are interest-based, fixed-rate or one that fluctuates according to the rate of interest. Mortgages at any level obviously involve interest.

Islamically there seem to be two options:

  • The Murabaha (Deferred sale finance) Mortgage
  • The Ijara (Lease to own) Mortgage

 The Murabaha Mortgage:

This is only really an option for individuals/families who have a fair amount of capital behind them, because it is a condition of this Mortgage package that you are expected to pay (circa.) 20% of your home’s value, on the day of purchase. However from that day the house will be registered as your own. You may pay off any debt that is outstanding on your home at any point. This package offers a fixed repayment period that is agreed between you and your lender, any a monthly repayment amount that is fixed for the term of your mortgage.

So how does the Murabaha Mortgage work?; When you find the house that you wish to buy, you arrange a sale price with the vendor as normal, however the bank pays the purchase price, then immediately sells the house to you at a higher price (the higher price is determined by the original price of the property, and the repayment period that you will have agreed with the lender), minus the percentage you pay as deposit.

The Ijara Mortgage:

This is a slightly more popular choice of mortgage, as you do not need a large amount of capital behind you to set up this mortgage, it is also slightly more flexible than its counterpart. An extra benefit to this type of mortgage is that it can even be taken out to replace an existing interest mortgage. The amount you pay each month is usually fixed yearly. The outstanding balance can be paid off at any time (usually) without incurring any penalties.

So how does the Ijara Mortgage work?; As with the Murabaha mortgage, you find a property that you wish to buy, and agree a purchase price with the vendor, the difference is that; your lender will then purchase, and gain ownership of the property. You will enter into a lease agreement with the lender. Each month you will be expected to pay rent to your lender and a contribution towards the purchase of your property.

Above taken from here

I personally dont know of any Muslims in the West who have took out any of the above mortgages, they often resort to “normal” mortgages. Why? Not entirely sure, but I can only assume. And shall do so. Perhaps because:

  • They dont trust these banks/companies due to them being in their infancy, and so dont trust these kind of transactions or the services they offer
  • They are unfamiliar with how these mortgages work
  • They have come across “bogus” Islamic mortgage lenders who dress up interest into “service charges” and “admin fee’s” which, no surprise, fluctuate annually and involve other “hidden” charges (much like banks do if you dont read the small print!)
  • The repayments involved are estimated according to what the lender proposes your property will be worth at the end of the 25 year period. So just because you purchase a 200K house initially, it doesnt mean your re-payments over the 25 year period will amount to 200K. Most probably you’ll be paying for a house that after 25 years comes to around 400-500K. Your re-payments will be based on that latter figure of 400-500K. If you sell the house before the date of maturity, its treated the same as conventional mortgages (exit penalty charges etc), if there is any profit at the end of all the charges, you keep that profit.
  • With the Ijara mortgage, you not only pay a monthly amount towards the loan but also pay RENT to the lender for the property, and so one essentially ends up paying MORE than they would, even with a conventional mortgage (which they do)
  • These mortgages are more expensive compared to conventional mortgages regardless of which one you opt for.
  • Some Ulema state these types of mortgages are still out of bounds within a Shariah context and dont adhere to it properly

You can read into this case study for more info

Anyone know of people who have took out Islamic mortgages? If so, how are they finding it? How does one go about purchasing a property according to Shariah in the West with all these issues? It seems near impossible which is why a few people I know end up living in council owned flats or rent for their entire lives.

The issue surrounding outright avoidance of interest leads some to ask and question:

 How does one generate wealth Islamically? Is it only by trade, or is investment allowed? If investments are permissible (which they are) what types and kinds are allowed? Invest in stock, shares, private equity?

Im not entirely sure how one generates wealth if they don’t involve themselves in trading goods and/or services.

Anyone have any insight into this?