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A Sharia mortgage, also known as an Islamic mortgage or halal mortgage, is a type of home financing designed to comply with Islamic principles. Sharia-compliant mortgages use alternative arrangements that avoid interest (known as "riba" under Islamic law). In this guide, we’ll explain what a Sharia mortgage is, how it works, the different types available, and how it compares to conventional mortgage products in the UK.
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Sharia mortgages offer an alternative way to finance a property purchase while following Islamic finance principles. Although often referred to as Islamic mortgages, there are several different types available, each with its own structure and requirements.
In this guide:
A Sharia mortgage, also known as an Islamic mortgage or a halal mortgage, is a home financing arrangement designed to comply with Islamic law (Sharia). Rather than charging interest on a loan, which is prohibited under Islamic finance principles, Sharia mortgages use alternative structures that allow individuals to purchase a property without paying or receiving interest.
While the term "mortgage" is commonly used, Sharia-compliant home finance works differently from a conventional mortgage. Instead of borrowing money from a lender and repaying it with interest, the finance provider and customer enter into an agreement based on either shared ownership, leasing, or a pre-agreed profit arrangement.
The aim is to provide a way for people to buy a home while adhering to Islamic principles. In the UK, Sharia mortgages are regulated financial products and are offered by a small number of specialist providers.
The key difference between a Sharia mortgage and a conventional mortgage is the treatment of interest (riba). Islamic finance principles prohibit the charging or payment of interest, so Sharia-compliant home finance is structured around alternative methods of financing.
Depending on the type of arrangement, the finance provider may:
Purchase the property and lease it to the customer
Buy the property jointly with the customer
Purchase the property and sell it on at an agreed profit
Although these arrangements are structured differently, they are all designed to help customers finance a property purchase in a way that aligns with Islamic finance principles.
Yes. The terms “Sharia mortgage” and “Islamic mortgage” are generally used interchangeably in the UK. Both refer to home finance products that are intended to comply with Islamic principles and avoid the use of interest-based lending.
Unlike a conventional mortgage, a Sharia mortgage does not involve borrowing money and repaying it with interest. Instead, the finance provider uses a Sharia-compliant structure that enables the customer to purchase a property while avoiding interest-based lending.
Although the exact arrangement can vary between providers, the process typically involves the customer contributing a deposit and making monthly payments towards occupying and eventually owning the property.
Most Sharia-compliant home finance arrangements follow a similar pattern:
The customer identifies a property they wish to buy.
The customer contributes a deposit towards the purchase.
The finance provider purchases all or part of the property.
The customer makes monthly payments under the agreed arrangement.
Over time, the customer's share of the property may increase until they become the sole owner.
Rather than paying interest on a loan, monthly payments are usually made up of one or more of the following:
Rent for the portion of the property owned by the finance provider
Payments to purchase additional shares in the property
An agreed profit amount, depending on the type of arrangement
The exact structure will depend on the Sharia mortgage product being used.
There is no single type of Sharia mortgage. Instead, Sharia-compliant home finance can be structured in several different ways, all of which are designed to avoid interest-based lending.
The most common types of Sharia mortgages available in the UK are Diminishing Musharaka, Ijara and Murabaha.
Type | How it works | Ownership structure |
|---|---|---|
Diminishing Musharaka | The customer and finance provider purchase the property together. The customer gradually buys the provider's share while paying rent on the portion they do not own. | Shared ownership that transfers fully to the customer over time. |
Ijara | The finance provider purchases the property and leases it to the customer, who makes regular payments under the lease agreement. | The provider owns the property initially, with ownership potentially transferring to the customer at the end of the term. |
Murabaha | The finance provider purchases the property and sells it to the customer at an agreed price that includes a pre-determined profit. | Ownership arrangements vary, but the customer repays the agreed purchase price rather than paying interest on a loan. |
While all three structures are used within Islamic finance, Diminishing Musharaka is one of the most common forms of Sharia-compliant home finance available in the UK. However, the products and structures offered can vary between providers.
Before entering into any home finance agreement, it's important to review the terms carefully and seek appropriate professional advice where necessary.
The conveyancing process for a Sharia mortgage is broadly similar to that of a conventional mortgage. A conveyancer will carry out the legal work required to transfer ownership of the property, including conducting property searches, reviewing contracts and completing the transaction.
However, because Sharia-compliant home finance can involve different ownership structures, there may be additional legal documentation to review and verify as part of the process.
When acting on a property purchase involving a Sharia mortgage, a conveyancer will typically:
Carry out property searches
Review the title and ownership of the property
Check the terms of the finance arrangement
Report any legal issues affecting the property
Liaise with the seller's solicitor and finance provider
Complete the legal transfer of ownership
The exact process may vary depending on the type of Sharia finance being used.
Learn more about the conveyancing process in our helpful guide.
Some Sharia mortgage structures involve shared ownership or leasing arrangements between the customer and the finance provider. As a result, there may be additional legal documents that need to be reviewed and signed before completion.
Your conveyancer will ensure the legal arrangements are properly documented and that all parties meet their legal obligations before the transaction is completed.
In many cases, the conveyancing timeline will be similar to that of a conventional mortgage. However, additional documentation or requirements from the finance provider can sometimes mean that extra checks are needed during the transaction.
Choosing an experienced conveyancer can help ensure the legal aspects of the transaction are handled efficiently and that any Sharia-specific requirements are addressed correctly.
Learn more about the full timeline to the conveyancing process here.
If you're purchasing or remortgaging a property using a Sharia mortgage, our experienced conveyancing team can help with the legal side of your transaction.
Like any form of home finance, Sharia mortgages come with considerations that buyers should be aware of before entering into an agreement. While these products are designed to comply with Islamic finance principles, they may not be suitable for every buyer or property purchase.
Some key considerations include:
Deposit and affordability requirements – Some Sharia mortgage providers may require larger deposits than those available with certain conventional mortgage products. Deposit requirements, affordability criteria and payment structures can vary between providers.
Additional fees and charges – Depending on the provider and type of agreement, costs such as administration fees, legal fees and early settlement charges may apply. As with any home finance product, it's important to understand the full cost of the arrangement before proceeding.
More complex legal structures – Sharia mortgages can involve shared ownership arrangements, leasing agreements or other alternative financing structures. As a result, the legal documentation may be more complex than that of a conventional mortgage.
Risk of repossession – Missing payments on a Sharia mortgage can have serious consequences. As with a conventional mortgage, failure to meet the terms of the agreement could result in repossession of the property.
Before proceeding with any home finance product, buyers are advised to consult specialised halal mortgage brokers and carefully review all terms before committing.
Although Sharia mortgages are designed to comply with Islamic finance principles, they are generally available to people of all faiths and backgrounds. In addition to Muslim buyers, some non-Muslim applicants are attracted to the ethical approach and alternative financing structure these products offer. As with any home finance product, applicants must meet the lender's eligibility criteria.
The exact criteria will vary between providers, but factors commonly considered include:
Income and employment status
Affordability
Credit history
Age requirements
Residency status
Eligibility requirements can vary between providers and products, so it’s important to check the specific criteria that apply to any home finance agreement you’re considering.
Many providers also require a deposit, although the amount needed can vary depending on the product and the applicant’s circumstances.
While the application process may differ slightly from a conventional mortgage, providers will generally carry out financial and affordability assessments before approving a home finance agreement.
Sharia-compliant home finance is available from a relatively small number of providers in the UK compared to conventional mortgages. These are often referred to as Home Purchase Plans (HPPs) rather than mortgages, although the terms are frequently used interchangeably.
The products, eligibility criteria, and financing structures available can vary between providers. Some may offer home finance based on Diminishing Musharaka, while others may use alternative Sharia-compliant arrangements.
As lender offerings can change over time, it’s important to check directly with the provider for the latest information on available products, fees and eligibility requirements.
Sharia-compliant home finance is available from a limited number of specialist providers in the UK. Compared to conventional mortgages, buyers may have fewer products and providers to choose from.
Despite their different financing structures, Islamic/Sharia mortgages offered in the UK are authorised and overseen by the FCA and PRA.
Remortgaging with a Sharia mortgage follows many of the same principles as a conventional remortgage, although the underlying finance arrangement may be structured differently. Homeowners may choose to move between Sharia-compliant providers or switch from a conventional mortgage to a Sharia-compliant home finance product.
Before a new agreement is approved, the finance provider will typically assess the property's value, review the applicant's financial circumstances and confirm that the relevant eligibility criteria are met.
As with other remortgages, conveyancing is often required to deal with the legal aspects of the transaction. Depending on the type of Sharia-compliant finance being used, there may be additional documentation relating to the ownership or financing structure that must be reviewed and completed before the remortgage can proceed.
Learn more about the remortgaging process with our 10-step guide.
Some providers offer Sharia-compliant finance products for buy-to-let properties. These arrangements are designed to follow Islamic finance principles while enabling investors to purchase residential property for rental purposes.
Eligibility criteria, deposit requirements and financing structures can vary between providers. As a result, buyers should carefully review the terms of any agreement before proceeding.
The legal process for purchasing a buy-to-let property with a Sharia mortgage is similar to other property transactions and will typically involve conveyancing, property searches and contract checks before completion.
Although both Sharia mortgages and conventional mortgages can be used to purchase a property, the way they are structured differs significantly. Sharia-compliant home finance is designed to avoid interest-based lending, while conventional mortgages are based on borrowing money and repaying it with interest.
Feature | Sharia mortgage | Conventional mortgage |
|---|---|---|
Financing structure | Based on shared ownership, leasing or profit-based arrangements | Based on a loan from a lender |
Interest charged | No | Yes |
Ownership arrangements | May involve shared ownership between the customer and provider | The buyer typically owns the property, subject to the lender’s security interest |
Monthly payments | May include rent, profits payments and/or purchases of additional ownership shares | Usually consist of capital and interest repayments |
Availability | Offered by a limited number of specialist providers | Widely available from banks, building societies and other lenders |
Purpose | Designed to comply with Islamic finance principles | Conventional home financing agreement |
The exact structure, fees and obligations associated with a Sharia mortgage will depend on the provider and the type of home finance agreement being used.
The cost of a Sharia mortgage will depend on the provider, the type of home finance arrangement and the terms of the agreement. Because Sharia-compliant products are structured differently from conventional mortgages, direct comparisons are not always straightforward.
While Sharia mortgages do not charge interest, providers may generate returns through rent, profit-sharing arrangements or other Sharia-compliant structures. Buyers should therefore consider the overall cost of the agreement, including any fees and charges, rather than focusing solely on how the finance is structured.
As products and pricing vary between providers, it's important to review the terms carefully and compare the total costs involved before entering into any agreement.
A Sharia-compliant mortgage should be structured in accordance with Islamic finance principles and avoid the use of interest-based lending. However, the way providers achieve this can vary depending on the type of home finance product being offered.
When researching a Sharia mortgage, it may be helpful to consider:
The type of financing structure being used, such as Diminishing Musharaka, Ijara or Murabaha
Whether the provider states that the product has been reviewed and approved for Sharia compliance
How ownership of the property is arranged throughout the term of the agreement
The fees, costs and payment structure associated with the product
The terms and conditions set out in the finance documentation
As products can differ between providers, it's important to review the documentation carefully to understand how the arrangement works and whether it aligns with your requirements.
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