A conventional mortgage is a loan with interest. Islamic home finance aims to reach the same practical result, owning your home, through trade, leasing or partnership instead of an interest-bearing loan.
Ijara: lease to own
The provider buys the property and leases it to you. Your monthly payment is made up of rent for using the property and, in many products, an additional payment towards buying it. At the end of the term, ownership passes to you.
Diminishing Musharaka: a partnership that shrinks
You and the provider buy the property together. Over time you buy the provider's share in instalments, and you pay rent for using the part you do not yet own. As your share grows, the rent falls, until you own the whole property.
Murabaha: cost-plus sale
The provider buys the property and sells it to you at a higher, fixed price paid in instalments. The price is agreed at the start and does not increase if you pay late.
Common questions
- Rent linked to a benchmark: many providers set rent with reference to a market rate. Under AAOIFI standards this can be acceptable as a way of pricing a genuine lease, provided the contract itself is a real lease and not a loan.
- Stamp Duty: UK tax rules were changed so that alternative property finance is not charged Stamp Duty Land Tax twice when the provider buys and then transfers the property.
- Ownership risks: in a genuine lease, major structural risks belong to the owner. Check how insurance and major repairs are handled in the contract.
What to check in the contract
- Does the provider genuinely own its share of the property, and bear the risks of ownership?
- How is the rent reviewed, and is there a cap?
- What happens on late payment? Late charges should go to charity, not to the provider's profit.
- What are the terms for early settlement and on default?
We provide an independent Sharia review of home finance contracts against AAOIFI standards, so you know what you are signing before you commit.