Islamic Mortgages

Types of Islamic Mortgage

In the UK, most Islamic mortgages are raised using the ijara, musharaka or murabaha models:

Ijara Mortgages
A normal ijara mortgage is a type of 'lease to own' contract.

The potential purchaser finds a property that they wish to buy and then agrees a price with the vendor. The purchaser's Islamic mortgage provider then negotiates a 'Promise to Purchase' agreement with their client and purchases the property at the agreed price on behalf of their client. Coupled with the 'Promise to Purchase' agreement is a lease agreement that defines the occupancy rights for the property. The Islamic mortgage provider's client (i.e. the purchaser in normal parlance) makes regular repayments to the financial institution that incorporates two elements:
payment of rent;
partial repayment of capital.

When the purchase price has been paid back in full, rental payments cease and title to the property is passed from the financial institution to the occupier.

By structuring the mortgage in this way, payment of interest is avoided and the Shariah law is not infringed by either party.

Musharaka Mortgages
A variant on the ijara mortgage is the musharaka shared ownership mortgage.

As for an ijara mortgage, the prospective homeowner locates a property that they wish to acquire and agrees a price with the seller. The Islamic mortgage provider then purchases the property on behalf of their client. Under a musharaka agreement, the client's first capital repayment (as part of the regular monthly repayments) to the Islamic mortgage provider becomes their first share (albeit small) in the property. As repayments continue, the proportion of the property owned by the client increases over time through the mortgage term. After the mortgage has been repaid in full, total ownership of the property passes to the client.

In a similar manner to an ijara mortgage, a musharaka mortgage alleviates the requirement for interest to be paid, so keeping the agreement within the Shariah law.

Summary:
An ijara mortgage is a kind of ¡¥lease to own' contract;
repayment of an ijara mortgage includes capital and rental elements;
a musharaka mortgage is a type of ijara mortgage that includes shared ownership of the property.