The would-be buyer locates a property that they wish to purchase and agrees a price with the vendor, as they would for an ijara or musharaka mortgage. The Islamic mortgage provider then purchases the property on their client’s behalf. Once this property purchase has been completed, the financial institution sells on the property to their client at a higher price (at cost price plus agreed profit). The following criteria are used when calculating the higher price that the homeowner must pay and hence the monthly repayments that they will be required to make throughout the mortgage term:
balance owing on the property after the client’s original down payment (usually at least 20 percent) has been paid;
length of the murabaha mortgage term;
size of the financial institution’s agreed profit (i.e. expected return on investment over the mortgage term).
Changes to the Islamic Mortgage Market
Until 2003, Islamic mortgages were unpopular in the UK because they were tax inefficient. Stamp Duty had to be paid twice over; once when the financial institution purchased the property and again when the property was transferred to their client. This purchase process must be carried out in two stages so that the mortgage is legal under Shariah rules.
After representations to the Chancellor of the Exchequer, the levying of double Stamp Duty on Islamic mortgages was removed, in April 2003. Before this change in the law, only two financial institutions offered Islamic mortgages in the UK, the United Bank of Kuwait (also known as Al-Ahli United Bank) and the West Bromwich Building Society. Since the change in the law, several major players including HSBC and the Lloyds TSB have entered the Islamic mortgage market.
With around 1.8 million Muslims living in Britain, it is anticipated that the Islamic mortgage market will continue to grow. A recent Datamonitor survey indicates that UK Islamic mortgage market could be worth approximately £1.4 billion by 2009.
With a murabaha mortgage, a financial institution buys a property on behalf of a client and sells it on to them at cost price plus agreed profit;
a customer will normally require to put down a deposit of at least 20 percent before being granted a murabaha mortgage;
The Islamic mortgage market has grown rapidly since 2003, following the abolition of double Stamp Duty on Islamic mortgages.