FAQs

Sharia law prohibits the concept of borrowing and paying interest on loans: conventional residential mortgages therefore present a problem for consumers who wish to observe Sharia law strictly.  In 2007 the Financial Services Authority (now the Financial Conduct Authority) expanded its rules to accommodate the concept of what it described as “home purchase plans” – which are compliant with Sharia law.

There are at present no Sharia-compliant lifetime mortgage products – since these work on the basis of interest being charged to the borrower’s account and rolled up for payment at the point where the property is sold.  Home reversion plans are more likely to be suitable for consumers who wish to release equity in a way which is compliant with Sharia law, since a proportion of the borrower’s property is sold, and there is no loan involved.

There are various methods of home purchase which are compliant – the main ones being

“Murahaba” and “Ijara”.  Basically they work like this:

• Murahaba – the bank buys the property and sells it back to the customer at a higher price.  The customer then pays the higher price by way of paying equal instalments, over a fixed term.
• Ijara – this is more common:  the bank buys the property and sells it back to the customer – on a leasehold basis – so the customer pays rent for a fixed period, at the end of which the (freehold) property becomes the customer’s.  The amount of rent paid each year is assessed according to market rates, not prevailing interest rates.