How Do Mortgages Work Under Islamic Law?

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Written By Adrian Cruce






So many Muslims these days do not even think about owning a family home when they live in a country that is non-Muslim. The common choice is to simply rent out for a long-term instead of taking out a bank loan that automatically involves interest. What should be known is that now the market did open to Islamic people, with no riba’, which are basically mortgage offerings that are completely compliant with the mandatory Islamic law.

Islamic Law’s Influence On Mortgages

Riba basically means usury-based business transactions and the Qur’an has quite clear prohibitions against it. Usury is prohibited as it is not blessed by Allah. Ungrateful sinners are not loved by Allah so the duty is to get rid of what remains after usury when the individual is a believer. When a debtor is in clear difficulty, he should be offered time until repaying is much easier. When remitting through charity you are appreciated.

At the same time, people say that Prophet Muhammad was against interest consumption. The person that is paying it or that witnesses the contract will be cursed. In the current Islamic judicial system all is about equity and fairness when comparing parties. A fundamental belief is that the transactions that include interest will be unfair. It offers a totally guaranteed return to lenders without borrower guarantees. Islamic banking has a main principle in sharing risks. This automatically leads to shared responsibility when looking at both losses and profits.

Islamic Alternatives With Mortgages

The modern banks will normally offer special Islamic financing through 2 options:

  • Murabahah – Cost Plus
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This is a transaction type through which banks will buy properties and then they will re-sell to buyers at a specific fixed profit. Properties will be registered under buyer names right from the start. Installment payments are basically made in the account of the bank every month. Costs will be fixed when the contracts are signed. There is an agreement done between parties. Absolutely zero penalties are allowed for late payments. Strict collateral is necessary in this case. The alternative would be a very high down payment that would protect the bank against a situation with default.

  • Ijarah – Leasing

The transaction type is quite similar to what we see in the rent-to-own or real estate leasing contracts. Banks will retain ownership after buying the discussed property. Buyers then make monthly installment payments. After all the payments are over, buyers end up with property ownership at a 100% rate.