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Islamic mortgages

Written By:
Myles Robinson - Expert Finance Advisor

Posted: Feb 13, 2023

Islamic mortgages – Sharia compliant for Muslims

To purchase a property, many devout Muslims need a specific mortgage. It must be fully Sharia-compliant. How do Islamic mortgages differ from other forms of borrowing? What’s more, how do you apply for one? Do banks offer Islamic mortgages?

We answer all your questions about Muslim mortgages and show you how to find a Sharia-compliant broker.

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What is an Islamic Mortgage? How do they work?

An Islamic mortgage can be used to purchase a property in the U.K. These mortgages are an alternative to traditional mortgages for Muslims who want a sharia-compliant method of financing.

These mortgages are also known as Home Purchase Plans (HPPs). They don’t conform to the definitions of mortgages. Instead, they are a partnership between an individual with a lender or Islamic bank. This is because there’s a reason.

The Islamic faith holds that money cannot be made from it. This is one of its guiding principles. Fairtrade is the only way to create wealth. Any form of finance that requires the payment of interest on borrowed money, such as a traditional mortgage, is not permitted under sharia law.


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Does an Islamic bank own the property?

An Islamic mortgage is not a mortgage. A bank will buy a property for a buyer (becoming the legal owners) rather than lending money to someone and charging interest. The buyer agrees to make monthly payments to the lender, consisting of rental and capital for a specified term. The legal title to the property is transferred to the buyer at the end of the term.

Only a few lenders can offer Islamic mortgages, which are considered very niche. A specialist broker can help you find out more about Islamic mortgages. They will have an intimate understanding of how they work, who offers them, and how to get one that is fully compliant with Sharia law.

Our unique advisor-matching tool can connect you with an experienced professional in Islamic finance who can help you navigate this process.

A mortgage broker can help you access 30% more mortgage markets. Get started with an expert today to discover how much you could save and unlock even more deals.

Different types of Islamic mortgages

There are three types available for Islamic mortgages in the U.K., Each offering a slightly different approach.

  • Partnership – Diminishing Musharaka
  • Ijara (leasing).
  • Murabaha (profit)

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Partnership – Diminishing Musharaka

The most popular form of Islamic mortgage is Diminishing Musharaka. It is also the most closely related to how a Home Purchase Plan is (HPP).

This agreement is essentially a co-ownership agreement between you (the borrower) and the bank. You make joint purchases, each of which will own a portion of the property. The deposit you make is your first share, and the rest belongs to the bank.

You pay monthly rent and capital to purchase the remaining shares and become the property owner. These payments are used to purchase shares held by the lender for a specified term (usually 25 years, like a traditional mortgage).

For example, if you wanted to purchase a house for £200,000 with a £40,000 deposit and then use this type of Islamic mortgage for the remaining £160,000 of the loan, your initial share would be 20%, and the lender would own 80%. As you make more monthly payments, your shares will increase while the lender’s share decreases. This is why the term “diminishing” is used.

This type of Islamic mortgage is the sharia-compliant repayment mortgage.


The principle of “lease to own” is the basis for an ijara agreement. After you have found the house you like and agreed on the price, your bank will buy it for you, making you the legal owner.

The lender will require you to pay a deposit, usually between 10% and 20%. This becomes your share of the property. It does not change until the entire outstanding balance has been repaid.

The capital and rent components of your monthly payments are the capital. Rent is the same amount throughout the entire term. The capital element will increase until it is sufficient for the balance.

When the term ends, the legal ownership of the capital is transferred to you. An ijara agreement is a sharia-compliant counterpart to an interest-only mortgage.

Murabaha (profit)

This type of Islamic mortgage is used most often for buying commercial property. A mortgage lender purchases the property for you and agrees to buy it at a higher price.

Suppose you find a property for sale at £500,000 and wish to purchase it using Murabaha. The lender will purchase it at that price and then sell it to you on a deferred basis for £600,000. This will allow you to repay the loan over a set term, but the property will be yours legally.

According to Sharia law, the lender’s profits are acceptable as they are viewed as fair trade transactions and not money made from money.

Although each type of Islamic mortgage is different, they all share the same basic principle: to offer various options for interest-bearing loans. They are also known as mortgage alternatives.

It can be difficult to decide which option is right for you. A qualified Islamic mortgage broker can help you make the right decision and guide you through the process. They can also help you complete all paperwork and negotiate with the lender to ensure the deal is sharia-compliant.


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Where and how can I obtain an Islamic mortgage?

There are currently four main providers of Islamic mortgages in the UK. Our advisors have strong working relationships with these lenders.

The Islamic mortgage market is expanding rapidly, with more providers like Stride Up or Habib Bank looking to launch their products soon.

You have the option of speaking directly with a lender. Be aware that the lender you contact will only talk to you about their products. In contrast, an independent broker who specialises in sharia-compliant mortgages would be able to advise you on the entire market.

As there is more competition and more choices, the greater the market’s benefits for consumers will be. It is crucial to have a broker who is not only experienced in Islamic mortgages but also has a solid understanding of the Muslim community’s needs and sharia law.

Get in touch to arrange for a specialist Islamic finance expert to meet with you and give you the guidance and advice you need.

Islamic mortgages: Deposit, fees, and costs

Depending on your circumstances and the lender, deposits for Islamic mortgages may range from 5% to 20%. The more you have to deposit, the lower your monthly payment will be and the greater your chance of getting a favourable deal.

You’ll also need to budget for the following costs:

  • Legal fees (both for you and the lender)
  • Survey and conveyancing
  • Stamp duty (if applicable).
  • Insurance on buildings and contents

Are Islamic mortgages more costly?

It all depends on which lender you choose for your Islamic mortgage and what terms they offer. This type of financing can be more expensive than conventional mortgages and requires larger deposits.

A skilled Islamic mortgage broker can identify the lenders that offer the best terms and have lower overall costs. They can also identify deals that do not require a deposit.

A Mortgage Broker has access to more deals than any other comparison site. Get started to discover more options and increase your chances of getting approved for a mortgage.


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Islamic mortgages available to buy and let

Buy-to-let property can still be a profitable investment. The good news is that there are Islamic mortgage providers that offer this option. This market is small, so only a few niche lenders are available. However, our advisors have strong working relationships with these lenders and can negotiate a deal for you.

The fees and deposits required will vary depending on which lender you choose. This is where an experienced broker’s guidance will prove invaluable. It could save you time and money by helping you navigate the current deals.

What are the potential risks associated with Islamic mortgages

Although an Islamic mortgage does not involve borrowing, repossession can still occur if you fail to make your monthly payments.

Lenders may view you as taking more risk by purchasing a property for you. This means they will let you stay at their property, provided you pay your rent on time. They can take the necessary action if you fall behind.

Before you decide which lender to choose, our Islamic mortgage specialists will happily walk you through the repossession guidelines.


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Match with an Islamic mortgage advisor

There are many things to consider when searching for an Islamic mortgage. That’s why it is important to work with an advisor who has experience in this type and understands the process of purchasing a property.

We can help. This free advisor-matching service will match you with a mortgage broker that can best help you reach your goals. Based on your needs and their experience in arranging Sharia-compliant mortgages, this will be the person we choose.

Send an enquiry to arrange a no-obligation, free call with an Islamic mortgage specialist.

Islamic Mortgage FAQs

Is there a regulation on Islamic mortgages?

They are. The Financial Conduct Authority (FCA) regulates Islamic mortgages like traditional ones. You get the same protection no matter what type of mortgage you choose.

Is an Islamic mortgage considered halal?

Islamic mortgages in the United Kingdom are considered permissible by Islamic law and are halal. This is because they are home purchase plans and not interest-bearing loans.

Traditional mortgages charge interest on the amount borrowed. This type of finance is considered haram.

Islamic mortgages are only available to Muslims

No, not at all. All Muslims can apply for Islamic mortgages. You can apply for a Home Purchase Plan if you are not a Muslim and want to finance your home more ethically.

How can I make sure my Islamic mortgage is sharia-compliant?

Each Islamic finance provider has a panel that guides them in all matters related to Sharia law. They will also be able to provide proof of their approval for certain products.

Are Islamic mortgage lenders able to conduct credit checks

Yes, they do. These credit checks will follow similar guidelines to conventional mortgages. However, the lender will still need to verify that you can maintain your monthly payments throughout the term.

Can I use Help-to-Buy to get an Islamic mortgage?

Yes, you can. You can use the money you have saved towards an Islamic mortgage deposit if you open a Help To Buy ISA account before closing.

The government will add £50 to every £200 you save each month, up to a maximum of £3,000.

Contact us today to discuss who offers Islamic mortgages.


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