Untapped demand: Islamic mortgages
Sharia-compliant mortgages are designed to let Muslims borrow while staying in line with Islamic Law, which forbids the paying or receiving of interest, which is known as ‘riba’.
From 2002 UK banks, led by Lloyds and HSBC, tried to appeal to British Muslims by offering specialised products differing in structure. The lender generally buys the property outright and leases it to the consumer, charging a rental fee in addition to taking repayments.
However, the mainstream market’s foray into the sector did not go as planned and Lloyds ceased offering the products in 2010 with HSBC following suit in 2012.
Currently the most high-profile Sharia-compliant lender in the UK is the Islamic Bank of Britain.
Nizam Patel, director of One Option Finance in Blackburn, who has advised on purely Islamic mortgages since 2007 on a regulated basis, explained: “HSBC doesn’t need to comply with Sharia. They were only offering the product because of the customer base.”
When asked why big banks withdrew from the Islamic market, he added: “Lack of market is one element, but on top of that these banks came on board and just thought they would put out products without educating the masses.
“Unfortunately financial literacy is not the average person’s strong point and a lot of them think a home purchase plan is the same as a mortgage reworded.”
Adam Hosker, director of Bradford-based Bespoke Finance, where 24.7% of the population are Muslim, has tried to attract Sharia business but to no avail.
He said: “We tried to push it a few years ago with marketing and it didn’t work out, so we don’t anymore.”
And Jim Martin, proprietor at Ashfield Mortgage Shop in Halifax, added: “At the time of the crash it became pretty big,”
“When I came into the job a few years ago Muslims were quite keen on compliant mortgages, but now it’s more mainstream.
“When I get enquiries it never comes up in conversation. The mortgages I’ve arranged for Asian families are the same kind of mortgages.”
Sharia home purchase plans can be more expensive than standard mortgages, with the Islamic Bank of Britain charging variable rates of 3.99% and 3.59% for 20% and 35% deposits until 30 June 2016.
Ray Boulger, senior technical manager of John Charcol, said: “They have never been more competitive on pricing and/or criteria than standard mortgages so although they can be used by non-Muslims there is no point.”
But Patel argued that the market simply needs is more competition to drive rates down.
He said: “Now there is a gap because of a lack of competition.”
“Six or seven years ago I challenged people to find the product that was the best, and I was surprised if someone brought me a product that was cheaper than the Islamic product.”
Check out this month’s Mortgage Introducer for an in-depth analysis of Islamic-equivalent mortgages.