How does an Islamic Bank mortgage work?

Do you want to know how an Islamic bank mortgage work? Why do they not take an interest? Then read this article to get all the details about this financing method. This article will also give you information regarding its mortgage alternatives, risks, etc.

Islamic Bank mortgage:

Islamic bank mortgage is not how a mortgage works. It helps finance buying a house or starting a business without any interest. These are not direct loans but include a business partnership. Many non-muslim people also take loans here because they are interest-free.

The main purpose of this bank is to give loans to people who want to buy a house or start a business. In this process, the bank becomes the house owner as they purchase the house on behalf of the borrower. In Islam, they believe that a loan is to give money from buying a house but not expecting profit from the loan.

How does an Islamic Bank mortgage work?

In Islam, money is just a medium of exchange. It says they should not gain any profit from lending or interests. This is an advantage of the Islamic Bank mortgage. Then how do they make profits? There are three riba-free mortgages they are,

Musharakah:

In this method, two parties co-partner to buy a house. They divide the price equally and buy the house. So the house belongs to the two parties. If it is declining the balance method, then the house belongs to the person with a high share. Now the other person pays the installments to complete the remaining half to get ownership of the house. In America, it is the most used Islamic financing way.

Ijara:

Here it is a lease-to-own agreement method. The bank purchases the house, and the borrower pays rent for future ownership. The borrower only owns the house once they complete the total payment.

After deciding on the house and fixing the house price, the borrower asks the banks for a loan and gets a quote. They will also give the repayment time, which should be 25 years.

Murabaha:

It is quite similar to a conventional bank, but here it doesn’t take interest but takes it as a deferred fee. The finance purchases the house and sells it for its increased price. Here the customer buys it by paying a deposit and repays the remaining amount over time.

Risks in Islamic Bank mortgage:

The property will not be under your name, and you will be a tenant at your own house.
Even though the finance is the legal owner, the borrower should pay the taxes, insurance fees, maintenance charges, etc.

How to find Islamic bank mortgages:

Not only in Islamic banks but you can also find Islamic mortgages in other UK banks as an alternative to buying a house. So you can find them by,

  • A broker assists you and gives the details about this banking process.
  • This is also regulated majorly by the financial conduct authority.

Process of buying a home in an Islamic bank:

People can purchase a house or start a business using this Islamic bank mortgage. The entire process of a loan is explained in the below steps.

  1. Qualification or application: The first step is to submit your application, including all the details. The details should include your requested house, price, finances, etc. The bank will verify all the details and tells you how small an amount you qualify.
  2. Processing: After your application, the loan process will start. Here it includes the details like buying property, registrations, costs, fees, etc.
  3. Under writings: After processing, the documentation works will be done here. In this step, the documents of the house, repayment agreements, and other details are written.
  4. Closing: This is the last step of your loan. Here you will get the house. They will give you all the repayment details. It is important to keep your job, residence, and finances.

Why are rates high in Islamic bank mortgages:

In an Islamic bank mortgage, no interest is added to your loans. So the finance will give you a house by increasing the price. Even though Islam doesn’t accept profit from loans, they don’t take direct profits from them. Even with late installments, they don’t charge an extra fee.

Frequently asked questions (FAQs):

How much deposit does a borrower need in an Islamic bank mortgage?

A borrower needs to deposit 20% with processing fees.

Does Islam allow mortgages?

Yes, it allows mortgages without any interest.

Which bank in the UK offers Islamic mortgages?

AI Rayan bank, Ahli United bank, and Gatehouse bank offers Islamic mortgage.

Is HSBC an Islamic bank?

Yes, it is an Islamic bank that was introduced in 1998.

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