General information only. This guide explains how Sharia-compliant home finance usually works in the UK. It is not advice, not an offer of finance and not a religious ruling. Products, criteria and Sharia structures vary between providers, so speak to a mortgage adviser before making any decision.
The short answer
A conventional mortgage is a loan with interest, which many Muslims prefer to avoid. In the UK, the Sharia-compliant alternative is usually called a Home Purchase Plan, and is often described as a Sharia mortgage or Islamic mortgage. Instead of lending you money, the provider buys the property with you. You pay rent on the part the provider owns and, over the term, buy that part from it until the home is entirely yours.
Home Purchase Plans are available for buying a home, for buy-to-let and for refinancing an existing mortgage, and several UK providers accept applications from expats living in the Gulf. Anyone can apply: you do not need to be Muslim.
How a Home Purchase Plan works
Most UK plans combine two Islamic finance contracts:
- Diminishing Musharaka (partnership). You and the provider buy the property together. You put in your deposit and the provider pays the rest, so you each own a share. Each month you buy a little more of the provider's share, so your share grows and the provider's shrinks.
- Ijara (lease). Because you live in, or let, the whole property, you pay the provider rent for using its share. As its share gets smaller, the rent you pay on it falls too.
At the end of the term you own the whole property. In most plans the provider holds the legal title, or a charge over the property, until you have bought it out, much as a lender holds a mortgage over a property today.
You may also come across Murabaha, where the provider buys the property and sells it to you at an agreed higher price paid in instalments. It is less common for UK homes.
What you pay each month
Your monthly payment usually has two parts:
- An acquisition payment, which buys more of the provider's share of the property, and
- A rental payment for using the share the provider still owns.
For buy-to-let there are often rent only plans, the Sharia-compliant equivalent of interest only, where you pay rent on the provider's share and buy it out at the end of the term, usually from the sale or refinance of the property.
The rental rate can be fixed for an initial period, such as 2 or 5 years, or variable. Providers set their rates with reference to the wider market, so payments are often similar to, or a little higher than, a conventional mortgage of the same size. Sharia scholars generally accept using a market rate as a pricing benchmark, because what you pay is rent for the use of the property, not interest on a loan.
Get a feel for the monthly figure. Our expat mortgage calculator shows how much finance you could raise and the monthly cost. The figures are for a conventional mortgage, but they give a useful guide to the size of payment to plan for.
Compared with a conventional mortgage
| Conventional mortgage | Home Purchase Plan | |
|---|---|---|
| How it works | The lender lends you money and you own the property | The provider buys the property with you and you buy it out over the term |
| What you pay | Interest, plus capital on a repayment mortgage | Rent on the provider's share, plus acquisition payments |
| Interest charged | Yes | No, certified as Sharia-compliant |
| Fixed or variable | Both available | Both available, rental rate fixed or variable |
| Choice of providers | Wide | Smaller, specialist providers |
| Deposit for Gulf residents | Usually at least 25% | Often 25% or more, varies by provider and country |
| Stamp duty | Standard rates and surcharges | Broadly the same as a conventional mortgage, with no extra charge for the provider's share |
Who certifies it as Sharia-compliant
Each UK provider has its plans reviewed and certified by an independent Sharia Supervisory Committee, a board of Islamic finance scholars. The committee approves the contracts and how the product is run, and reviews it over time. Providers usually publish the names of their scholars and their certificates, so you can see who has approved the plan.
Scholars do not always agree on every detail, so if a particular structure matters to you, ask to see the certificate and read how the plan works before you commit.
Applying from the Gulf
Islamic finance is part of everyday banking across the Gulf, so many expats there already know how these products work. Applying for a UK plan from the Gulf is much like applying for a conventional expat mortgage:
- Choice is narrower. Fewer providers offer Home Purchase Plans to people living abroad, and each has its own list of accepted countries and nationalities.
- Deposits are higher. Expect to need 25% or more, depending on the provider, your country of residence and whether it is your own home or a buy-to-let.
- Income is assessed the same way. Providers look at your gross salary in AED, SAR, QAR, BHD, KWD or OMR, may reduce it to allow for exchange rate movements, and treat allowances and bonuses in their own way.
- The paperwork is similar: passport, Gulf residence ID, employment contract, payslips, bank statements and proof of your deposit.
For a fuller picture of how UK lenders look at Gulf residents, read our guide Can I get a UK mortgage while living in the Gulf?
Buy-to-let and refinancing
Buy-to-let. Sharia-compliant buy-to-let plans work on the same principles, with the amount based mainly on the rent the property will earn. Providers test that the rent covers the payments by a set margin, much as conventional buy-to-let lenders do. Some providers also offer plans for buying through a UK limited company.
Refinancing. If you already own a UK property with a conventional mortgage, you can usually switch it to a Home Purchase Plan. The provider buys a share of your property, which pays off the mortgage, and you then buy that share back over the term.
Stamp duty and other costs
Because the provider buys the property first and you buy it out later, you might expect stamp duty to be charged twice. UK law includes a relief for alternative property finance that prevents this, so the stamp duty is broadly what you would pay with a conventional mortgage. The usual surcharges still apply: in England and Northern Ireland, buyers who are not UK resident pay a 2% surcharge, and a further 5% applies if you already own another property and are not replacing your main home. Your solicitor calculates and confirms the final figure.
Plan your budget. Our stamp duty and buying costs calculator adds up your deposit, stamp duty and fees in one figure.
Other costs to allow for are the provider's arrangement fee, a valuation, and legal fees. Use a solicitor who is approved by your provider and familiar with Home Purchase Plans, as the paperwork differs from a standard mortgage. Ask too about any fees for buying the provider out early or selling during the term.
Regulation and protection
In the UK, Home Purchase Plans on a home you, or your family, will live in are regulated by the Financial Conduct Authority, in the same way as conventional residential mortgages. That gives you the same right to complain to the provider and then to the Financial Ombudsman Service. Buy-to-let plans, like most buy-to-let mortgages, are generally not regulated.
As with any home finance, your home or property may be repossessed if you do not keep up the payments.
Before you apply
- Compare the total cost, not just the rate. Look at the rental rate, the fees and any early buyout charges over the period you expect to keep the plan.
- Check the structure and the certificate if a particular Sharia structure matters to you.
- Plan your deposit early. A larger deposit opens up more providers and better pricing.
- Get your paperwork ready, especially an employer letter setting out your salary and allowances.
- Use a specialist adviser who knows which providers accept Gulf residents and how each one assesses income.
Talk it through with an adviser
Sharia-compliant providers each have their own criteria for overseas applicants, so the right provider depends on your country, income, deposit and plans for the property. Speak to a specialist UK expat mortgage adviser, who will check which providers suit your circumstances. The first consultation is free.