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Sharia Compliant Mortgage Alternative

Sharia Compliant Mortgage Alternative Finance Explained

Providers of Sharia Mortgage Alternative Finance do business according to a set of principles, derived from Islamic teachings, which encourage fair play and ensure that financial affairs are handled responsibly. Their property finance products are suitable for Muslims and non-Muslims alike. This page explains a bit about the principles and what they mean in practice for property finance.

The Principles

Shariah principles promote trading and enterprise to generate real wealth for the benefit of the community as a whole. It does this in a way that provides stability, is transparent and facilitates sharing of both risk and reward in an equitable way. There are some key differences between Shariah and conventional finance and investments:

  • Finance and investments must not be used to support industries or activities that are against Shariah principles. These include alcohol, tobacco, gambling, adult entertainment and arms.
  • Money must be put to a good use to generate profit supported by a genuine trade or business related activity. The giving or receiving of interest (making ‘money from money’) is prohibited.

 

How it works in practice

Rather than paying interest on a bank loan used to purchase or refinance a property, the customer buys the property jointly with the Finance Provider. Each party has a stake, according to the amount each has contributed. The customer leases the part of the property owned by the Finance Provider and pays a monthly rental payment. The Finance Provider is the registered owner of the property. At the end of the finance term, if all payments have been made, full ownership of the property transfers to the customer.

In Shariah finance, the process of buying an increasing share in the property is called Diminishing Musharakah. Musharakah means ‘joint venture’, an Arabic term that can be used to describe this type of property finance arrangement. Similar to the conventional mortgages, there are two types of Diminishing Musharakah arrangement – acquisition and rent only.

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Rent Only Diminishing Musharakah

Both the customer and the Finance Provider contribute a percentage towards the purchase or refinance of a residential property.

The Finance Provider then leases its share in the property to the customer for the duration of the finance term.

Over the finance term, the customer makes monthly payments to the Finance Provider which comprise of rent only. The customer is only obliged to purchase the share at the end of the finance term, so the customer’s share in the property remains the same throughout the term.

However, if the customer wishes to acquire a part of the Finance Provider’s share in the property during the term (subject to a specified minimum), the customer can do so on each rent review date. In addition, the customer can purchase the Finance Providers entire share and settle the facility at any time.

Until the Finance Providers share has been acquired by the customer, the Finance Provider charges the customer rent for the use of its share of the property. The rent is calculated according to the respective shares owned.

Following the customer’s acquisition of the Finance Provider’s entire share, either at the end of the agreed term or upon early purchase of the Finance Provider’s share of the property, they transfer registered ownership of the property to the customer.

It’s the customer’s responsibility to put in place, maintain and regularly monitor any financial arrangements that are expected to provide a lump sum big enough to acquire the Finance Provider’s share at the end of the agreed finance term.

Acquisition Diminishing Musharakah

Both the customer and the Finance Provider contribute a percentage towards the purchase or refinance of a residential property.

The Finance Provider then leases its share in the property to the customer for the duration of the finance term.

Over the finance term, the customer makes monthly acquisition instalments – this is how the Finance Provider will sell its share of the property to the customer. With each acquisition instalment, the Finance Provider’s share in the property diminishes while the customer’s share increases.

While the acquisition instalments are being made, the Finance Provider charges the customer rent for the use of the bank’s share of the property, calculated according to the respective shares owned.

After the customer acquires the Finance Providers entire share, either at the end of the agreed term or in an early purchase, the Finance Provider transfers registered ownership of the property to the customer.

Disclaimer

Please ask me for more details as these fees will be tailored to your circumstances, please do not instruct your own solicitor, prior to obtaining a decision in principle on this option as the solicitor you choose should be experienced in Sharia Compliant Buy to Let mortgage alternative finance. We do NOT give financial, currency, tax or legal advice and confirm that You have taken such advice from an appropriate third party in relation to either a conventional mortgage or a Diminishing Musharaka Finance Product (DMPF) and the potential taxes that we do not give advice on include (not exclusively) income tax, stamp duty & Capital Gains Tax (CGT).

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