What Is an Islamic Mortgage?

An Islamic mortgage is a home loan that complies with Islamic law, allowing devout Muslims to borrow money to purchase homes without compromising their religious values. There are several approaches to lending in the Islamic banking industry, and financial firms may offer their products to non-Muslims as well. This financing option is available in nations around the world, particularly those with a large Muslim population and home prices too high for buyers to be able to afford to pay cash outright.

Under Islamic law, the practice of riba, or interest, is prohibited. Islamic law does not forbid engaging in banking and other financial activities, but it must be done with the intent to benefit both parties. Legal scholars argue that interest only provides a benefit to the lender, not the borrower, and is thus prohibited. Islamic mortgages eliminate interest and may be known as la'riba, or “no interest" loans, for this reason.

One approach to an Islamic mortgage is murabahah, an arrangement where a bank buys a home at full price, determines an appropriate markup, and resells it to the borrower on an installment contract. In this arrangement, both parties benefit, as the borrower receives assistance with home ownership, and the bank makes a reasonable profit on the transaction. The two parties act as partners while the title for the home goes immediately to the borrower.

Musharaka is another option. In this type of transaction, the borrower enters a transaction with the assistance of an investor who supplies the bulk of the purchase price. The two parties are partners in ownership, and one party pays the other. This arrangement is known as a declining balance co-ownership, where the eventual goal is for one partner to buy out the other. Investors are usually real estate firms, but families and businesses can also offer musharaka loans to other businesses and private parties.

The ijarah is another form of Islamic mortgage, where the bank and buyer set up a rent-to-own agreement. The bank retains title to the property and the borrower pays monthly rent until the balance is paid off and she owns the home free and clear.

Islamic mortgage products at some companies are reviewed by Islamic scholars and authorities to make sure they conform with the law. The company can provide more information on request to assist borrowers with the process of making an informed choice. In other settings, such companies may offer loans without guarantees that they comply with the law, and borrowers will need to evaluate the terms and conditions of a supposedly Islamic mortgage to determine if it is appropriate for their needs.