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Islamic Mortgage - Another way
Neither a borrower nor a lender be, states Islamic law. Oliver Morrison explains how British Muslims can buy their homes without compromising their faith.
There are now 2.5 million Muslims in the UK , which makes Islam the second largest religion in the UK behind Christianity. This huge community, however, is forbidden by Islamic law - Shariah - to take out mortgages.
"The principle of taking money for no work or effort is forbidden by Islam," explains Dr Anas Abushadi, a scholar at Regents Park Mosque in central London. "Money doesn't produce money, but money has to be produced by effort and work. This is why interest is forbidden and accordingly mortgages are not allowed."
Tradition
Traditionally, Muslims have saved up and bought property outright or relied on borrowing money from within the family to avoid dealing with interest. With today's soaring house prices, though, this is pretty much an impossibility. It is no surprise that the professional second generation twenty and thirtysomething Muslims who want to join the party and get on the property ladder are mostly are taking out traditional mortgages. "They know they are committing a sin," says Dr Abushadi. "But they say it is a necessity and that they have no other choice." Very few, though, are taking out mortgages specifically designed for Muslims - generally called Shariah-compliant or Islamic mortgage.
Other options
At the moment the only company in the UK to supply this type of Islamic mortgage is the Ahli United Bank (formerly called the United Bank of Kuwait).
It has two types of Islamic mortgage both based on Islamic financing principles and approved by Islamic scholars. First is the Ijara plan. This works by the bank buying the borrower's choice of property. The customer then agrees a set period of time to pay the capital back to the bank. While they are repaying the capital they pay a monthly rent to the bank spread over a term of up to 25 years. Once the capital is paid in full, the rent ceases and they become the owners of the property.
The other is the Murabaha plan. Again, the Ahli United Bank buys the borrower's choice of property. It then increases the price of the home (based on several factors including its price) and the customer pays back the higher price to the bank over a term of up to 15 years.
Downside
While this all sounds similar to a conventional mortgage, the downside is the cost. Because the bank takes ownership before the homebuyer two sets of stamp duty have to be paid (the average homebuyer pays around £800 in stamp duty). If you are remortgaging you could be paying three lumps of stamp duty. You also have to pay legal fees and arrangement fees and you will need to pay upfront at least 20 per cent of the bank's valuation of the property you wish to purchase. Customers are also more limited in the amount they are allowed to borrow.
Many potential customers, therefore, find they don't actually qualify for these type of Islamic mortgage. The Ahli United Bank only has around a thousand customers on its books at the moment with average mortgage amounts of £100,000.
It has, though, received tens of thousands of enquiries in the five years it has been on the market. Since October, it has had nearly four hundred referrals from the West Bromwich Building Society, which has an agreement to refer potential customers to the bank.
Keith Leach, manager of the Ahli United Bank, argues its product is still relatively unknown. "The market is extremely undeveloped and there is probably still a large proportion of the Muslim population that don't know we exist," he says. "You'll find a large percentage of the Muslim population knowing that interest is forbidden but who probably put it to the back of their minds and carry on life normally."
So there is a massive pool waiting to be tapped in to. Market analyst Datamonitor, for example, believes that the halal mortgage market could potentially be worth as much as £9,200 million in terms of balances outstanding. If the affordability issues - notably stamp duty - that have to date suppressed the market to a worth of just a few million could be resolved the market could be worth as much as £4.5 billion three years from now.
This excites lenders. HSBC Amanah is the big name rumoured to be considering entering the market as soon as possible. At the moment, though, lenders see it as too expensive. Before this pool can be tapped into they want a level playing field so it can be done in a competitive way.
The future
Because of this, over the past year industry-wide talks set up by the Governor of the Bank of England Eddie George have been taking place. In the discussions have been HSBC, the Ahli United Bank, representatives from the Muslim Council of Britain and Union of Muslim Organisations and experts in Islamic mortgage finance including Shariah scholars.
The main taking point has been a change in the law regarding stamp duty. The Government has been sympathetic, but changes have been slow coming as it claims there is no easy solution. Now, though, it looks like we're getting somewhere. The Government says it will look at halal mortgages as part of its ongoing review of the stamp duty system, which it is due to report back on in this year's budget at the beginning of April [after Mortgage Magazine went to press]. "We are actively looking at how we can help to make halal mortgages compliant so that they don't face paying higher or double stamp duty," a spokesperson for the Treasury says.
The Government denies it is going to move any faster on this because of the political situation elsewhere in the world. With community relations a worry, and many Muslims complaining they are feeling victimised by society, a cynic might suggest that the Government could win some valuable political points by making it easier for the Muslims in the UK to borrow the mortgages of their choice. But the spokesperson for the Treasury responds: "We are not interested in winning political points, we are trying to make the system fair for everyone." nce it is fairer for everyone it is felt that the market could experience explosive growth, particularly in areas of the country that have large Muslim populations, such as Leicester and Bradford.
But Mike Leach from the Ahli United Bank warns it won't necessarily be as simple as that. "If the high street banks did it properly it would be very worthwhile for them," he says. "But it's quite difficult to do. While it may look like a conventional mortgage, in many ways there are a lot of bits to it which means it's quite difficult to sell and promote and discuss with clients. You need to know all of the issues to do the job properly.
"For example, it would be quite an exercise for a high street bank with branches all across the country to train staff to understand why an Islamic mortgage operates the way it has to."
Case Study
Shorof Uddin, 27, an accountant from Birmingham is taking out two Sharia-compliant mortgages with the Ahli United Bank. He is remortgaging his £135,000 flat in Birmingham and he is buying a property to let in East London. He purchased his flat two years ago with a traditional high street mortgage and then discovered there was a halal (lawful) option six months ago.
So how did he feel when he first bought a flat using a traditional, high street mortgage two years ago? Did he feel he compromised his beliefs? "The rules are fairly clear that you can't buy a property on an interest-based mortgage," he says. "It is clear-cut: every one knows it." He justified it, like many other Muslims in the same situation, on the grounds that it was a necessity. There was not an Islamic option available, so he bought a property rather than be homeless.
"That's not a perfect argument," he explains, "you can always rent, which is a halal option, or you can get something from a council etc. So in my circumstances I kind of knew that what I was doing was wrong." However, as a devout and practising Muslim, as soon as Uddin discovered there was a viable Islamic mortgage alternative out there, he jumped at it.
"If there is the option to eat halal meat - I will always eat halal meat," he explains, "if there is the opportunity to get a Islamic mortgage - I will always get a halal mortgage, even though it is considerably more expensive." Uddin estimates he is paying an extra £3,750 in stamp duty, arrangement fees, penalties (for remortgaing) and legal fees for his mortgages with The Ahli United Bank.
He is not typical. While other devout Muslims will always choose the halal mortgage option when they can, most are still adopting the traditional methods of renting, borrowing money from within the family or accepting a high street mortgage. Muslims are either unaware that there is this Islamic mortgage alternative available, or put off or ineligible because of the high costs. For example, it is possible to borrow up to five times your salary with a traditional high street mortgage. With the Ahli United Bank, you will only be given three. You will also have to pay an arrangement fee of 0.75 per cent, legal fees and an extra dose of stamp duty. If you are remortgaging you could pay three doses.
Furthermore, there are also only two options available with the Islamic mortgage offered by the Ahli United Bank. With a conventional lender there is a vast array of options available to suit your budget and mindset. So for some Muslims the financial temptations offered by traditional lenders is too great.
Uddin, though, simply won't compromise his religion. "It's a case of 'what price do you put on your faith?'" he says. "In my case, my faith is priceless." This question seems more pertinent than ever. With house prices more affordable, first generation Muslims who came to Britain in the 1960's would have found it easier to save and buy property and also borrow and lend money between families. Hence the question 'mortgage' and the religious quandary it posed rarely arose.
Shorof's generation, however, has a far tougher time getting on the property ladder and as such is more likely to experience this religious quandary of mortgage borrowing. It is ironic that as second generation UK Muslims have become more and more integrated and affluent in society, it has given them the choice to express their religion in the form of things such as Sharia-compliant borrowing.
Shorof agrees.
"In our parents generation, if you look at the way they practised religion, it's different to the way that young people are practising today. Young people today are a lot more pro-active than our parents were." The main reason for that, he says, is increased literacy. "In my parents' day everyone worked in factories. My generation are all professional people. We like to question things and find out about things. We don't take our religion for granted. We will interrogate our religion."
Shorof concludes his generation is very comfortable as Muslims.
Useful Links
HSBC Amanah http://www.hsbcamanah.co.uk/amanahuk/home-finance/index.html
Muslim Council of Britain http://www.mcb.org.uk/
Ansar Finance www.ansarfinance.com
The fact that Islamic mortgage look set to enter the high street in a big way is a tribute to that.
