How Does a Sharia Mortgage Work?

One of the dictates of Sharia law is that interest-bearing loans are forbidden and so many wonder how exactly they will be able to purchase a home or get a mortgage without paying interest.  Luckily, financial institutions have developed Sharia-compliant arrangements which are effectively mortgage alternatives that achieve the necessary objective while still staying true to the doctrines of Islam.

Let’s look at how these mortgages typically work:

• Typically, the bank or home loan provider will purchase the property on your behalf by paying the full purchase price upfront, becoming the legal owner in the process.
• They might add a small premium to the price to account for payment over time.
• Then, you will make monthly payments to the home loan provider that functions as a traditional rent payment, and a portion of that payment will go to buying out the equity portion of the house.
• Once you’ve paid all the payments across the agreed period, you become the legal owner of the property.

Arrangements like this allow for longer-term home purchases without paying interest, which is a crucial innovation for Sharia-compliant financial services.  Typically, you would be required to pay a 20% deposit upfront, but this varies depending on which provider you are using.  There are also three different categories of these mortgages:

• Ijara: In this plan, your monthly payments are split between rent and capital, and as such – your ownership share remains constant throughout the term.

• Diminishing Musharaka: This represents a joint purchase agreement with the bank where you pay off their share in installments.  Your ownership rises proportionally, as their ownership shrinks.

• Murabaha: In these agreements, the loan originator adds a premium to the price of the property, and you pay off that increased price in equal installments over time until you gain control of the property’s ownership.

Each of these categories has its pros and cons and the choice between them will depend on your personal situation and your preferences.  But, whichever one you enter into, you can rest assured that they replicate the economics of a traditional mortgage while still remaining Sharia-compliant through and through.  They can be slightly more expensive than interest-bearing mortgages but that is because there are additional costs in terms of a Sharia supervisory board and because they don’t enjoy the economies of scale if they are part of a larger organization where the Sharia department is just a component.

All that being said, if you do go with a dedicated provider like Saudi Home Loans, you can get really competitive rates and world-class customer service.  As a company, they have realized the gap in the market and are committed to making home loans much more accessible than they ever were before.  They are at the forefront of Sharia-compliant financial services and show just what is possible when you innovate on the product and build the right partnerships within the marketplace.

Whether you go with them or somebody else, be sure to do your research and make sure that the arrangement you’re entering into is one that suits and the home you’re looking to purchase.  If it’s the right fit, and you’re working with the right financial provider, then the home of your dreams is within your reach!