Islamic Mortgages in the UK – How AFG Law can Assist

Buying a home is one of the biggest financial decisions most people make, but for many Muslims in the UK, finding a mortgage that aligns with Islamic law can be challenging. Traditional or conventional mortgages involve paying interest, which is prohibited under Islamic finance principles. Fortunately, several Islamic banks and financial institutions now offer Sharia compliant alternatives, known as Islamic mortgages or home purchase plans.

AFG Law have developed a tailored, comprehensive and innovative process to guide clients through the specialised documentation requirements involved in Islamic mortgages. As part of this, our residential property team will also ensure to liaise directly with the solicitors appointed by the Islamic mortgage lender, ensuring a seamless experience for clients from start to finish.

Our property solicitors have extensive experience in home financing and commercial property transactions involving Islamic finance products. We can help ensure your agreement is fully compliant, clearly drafted, and legally sound from start to finish.

Rahil Khan, Director at AFG Law and leader of the new service provision said, ‘Our team’s in-depth knowledge of the local property market enables us to offer expert representation and practical professional support throughout the Islamic mortgage process. We are really proud as a firm to be offering a culturally aware and legally sound solution that reflects the needs of our diverse client base.’

Contact us today to find out more on how we can assist with Islamic mortgages.

What is an Islamic mortgage?

An Islamic mortgage is a compliant alternative to a traditional mortgage that adheres to the principles of Islamic law (Sharia). Rather than charging or paying interest (riba), an Islamic mortgage is structured so that the bank purchases the property or buys the property jointly with the customer. You then pay rent or buy back the bank’s share over time until you fully own the home.

These products are regulated by the Financial Conduct Authority (FCA) to ensure consumer protection and transparency, just like any other financial services product in the UK.

How do Islamic mortgages work?

Islamic mortgages work differently from conventional mortgages because they do not involve interest payments. Instead, the Islamic bank and the buyer enter into a partnership or lease agreement.

Typically, the process follows these steps:

1. You identify the property you wish to purchase.
2. The bank buys the property on your behalf or jointly with you.
3. You pay a monthly amount to gradually purchase the property from the bank, along with rent for using their share.
4. Once you have repaid the full purchase price, ownership is transferred entirely to you.

This structure ensures that the financing remains Sharia compliant while still allowing Muslims in the UK to own property.

Types of Islamic mortgage

There are several types of Islamic mortgage arrangements available in the UK. The most common are:

1. Ijara (Lease-to-own agreement)

Under an Ijara arrangement, the bank buys the property and leases it to you. You make regular payments consisting of rent and contributions towards buying the property’s ownership. When all payments are complete, the property ownership transfers to you.

Key features:

• The bank owns the property during the term.
• You pay rent for using the home.
• The agreement is structured to comply with Islamic law by avoiding interest.

2. Murabaha (Cost-plus sale)

With a Murabaha mortgage, the bank purchases the property at the market price and then sells it to you at a higher purchase price, which includes an agreed profit margin. You pay this total price in instalments.

Key features:

• The bank’s profit is fixed at the outset.
• No interest is charged.
• This model is popular for commercial property purchases as well as residential homes.

3. Diminishing Musharaka (Partnership model)

This is one of the most popular home purchase plans in the UK. The bank and the buyer jointly purchase the property. You gradually buy out the bank’s shares over time while paying rent for the portion you do not yet own.

• Key features:
• Shared ownership between you and the bank.
• The bank’s share decreases as your payments increase.
• Eventually, you become the full owner.

Each of these Islamic mortgage offers is structured to ensure full compliance with Sharia principles, while also being legally recognised by the Financial Conduct Authority.

Benefits of a Sharia compliant mortgage

Opting for an Islamic mortgage can offer several advantages:

• Faith-based compliance: Ensures your home financing aligns with Islamic law and avoids interest (riba).
• Transparency: The total cost and repayment structure are agreed in advance.
• Ethical investment: Funds are not used for industries considered haram, such as alcohol or gambling.
• Legal recognition: Fully regulated by the Financial Conduct Authority and protected under UK law.

The Role of a Solicitor in an Islamic Mortgage

A solicitor’s involvement is essential in every stage of obtaining an Islamic mortgage in the UK. At AFG Law, we help clients through both the legal and religious dimensions of these agreements.

Reviewing and explaining the contract

Islamic mortgage agreements can be complex, often involving multiple documents such as partnership deeds, lease agreements, and purchase options. Your solicitor will:

• Review all contracts from the Islamic bank or lender.
• Explain key terms in plain English.
• Confirm that your obligations are fair and transparent.
• Ensure that the structure avoids interest and complies with Islamic finance rules.

Ensuring Sharia and legal compliance

While the lender ensures the mortgage is Sharia compliant, your solicitor ensures it also meets UK legal standards. This includes verifying:

• Property ownership transfers are valid under English law.
• The mortgage structure aligns with both Islamic law and the Financial Conduct Authority’s consumer protection regulations.
• The home purchase plan complies with land registration requirements.

Conveyancing and due diligence

Your solicitor manages the legal transfer of property ownership. This includes:

• Conducting property searches.
• Checking title deeds and ownership history.
• Liaising with the bank’s solicitors.
• Handling completion and registration at HM Land Registry.

Protecting your interests

Solicitors ensure that your rights are protected if issues arise, such as:

• Early repayment or selling the property before completion.
• Disputes over rental calculations or profit shares.
• Default or repossession scenarios.

Common Questions About Islamic Mortgages

1. Are Islamic mortgages available to non-Muslims?

Yes. Anyone can apply for an Islamic mortgage in the UK. Many people choose them for their ethical and transparent structure, regardless of faith.

2. Do Islamic mortgages cost more than conventional mortgages?

The overall cost can be similar, although it may vary depending on the provider. The key difference is that you are paying rent or profit instead of interest. Our solicitors can help you understand the total purchase price and ensure the terms are fair and transparent.

3. Who owns the property during the mortgage term?

In most cases, the bank owns the property (Ijara and Murabaha) or shares ownership with you (Musharaka). As you make payments, you increase your ownership share until you own the home outright.

4. What happens if I want to sell the property?

You can usually sell the property at any time, but it will require settling your outstanding balance with the bank. Your solicitor can help ensure the sale and settlement process complies with your home purchase plan terms.

5. Can I re-mortgage an existing property with an Islamic mortgage?

It may be possible to refinance your existing mortgage through an Islamic finance product. The bank will typically purchase the property and establish a new Sharia compliant agreement with you.

How AFG Law can help

Whether you are buying your first home, investing in commercial property, or looking for a compliant alternative to a conventional mortgage, AFG Law can provide the specialist advice you need.

Our services include:

• Reviewing and advising on home purchase plans
• Liaising with Islamic banks and lenders
• Ensuring compliance with Islamic finance principles
• Drafting and negotiating legal documents
• Managing the conveyancing process from start to finish

We work with individuals, families and businesses across England and Wales to make Islamic mortgages straightforward and stress-free.

If you are considering an Islamic mortgage in the UK, our expert solicitors can guide you through every stage of the process.

If you would like to get in touch with Rahil Khan regarding purchase of a home with an Islamic mortgage, please email him at rahil.khan@afglaw.co.uk or call 01204 920108.