Conventional mortgage or Islamic home finance

What really changes

The cost can be close; it is the contract that changes. The International Islamic Fiqh Academy accepts that a deferred price be higher than the cash price (resolution 51 (2/6)), whereas any surplus on a loan is riba (resolution 10 (10/2)).

• Murabaha: the bank buys the property, owns it and bears its risk before reselling it to you; the price is fixed once and for all (resolutions 40 and 41 (2/5 and 3/5)).
• Diminishing musharakah: you are a co-owner from the start; you rent the bank’s share and buy it back gradually, at a price set at each purchase, never guaranteed in advance at the original value (resolution 136 (2/15)).
• Late payment: no surplus may be added to the debt (resolution 51 (2/6)); some banks ask for a commitment to donate to charity, which does not benefit them.
• Ijarah: insurance and major maintenance fall on the owner, the bank, and the insurance must be cooperative (resolution 110 (4/12)).
• Early repayment: a discount may be granted, provided it was not agreed in advance (resolution 64 (2/7)).

Why the price looks like an interest rate

Islamic banks often set their profit or rent with reference to market rates. Such a benchmark, used only to set a price, is accepted by many Shariah boards and criticised by others. What matters for permissibility is the substance of the contract: ownership, risk, a fixed price, no penalty for the bank’s benefit.

The equivalent annual rate shown here is for comparing costs; it says nothing about permissibility.

To check before signing

• Who owns the property, and from when?
• What happens if a payment is late?
• Is the contract approved by a Shariah board, and which one?
• What extra costs: fees, transfer taxes depending on the country, insurance?
• Can you repay early, and on what terms?

Related questions

• Are Islamic banks really halal?
• Is a conventional mortgage permitted?
• Is property crowdfunding permitted?