What makes a traditional mortgage haram? Understanding riba in housing

For many Muslims in the UK, buying a home comes with a unique challenge. Conventional mortgages are based on interest (riba), which is prohibited in Islam. This makes standard home financing incompatible with Islamic values. The good news is that halal home financing alternatives exist, allowing Muslims to purchase a home without compromising their faith.

Why are conventional mortgages haram in Islam?

The main issue with traditional mortgages is riba (interest). The Qur’an strictly forbids earning or paying interest because it enables one party to profit without sharing risk or effort.

In a typical mortgage:

• The bank lends money to the buyer.
• The buyer repays the loan with added interest.
• The buyer must repay the loan with interest regardless of what happens to the property. The buyer takes all the risk in the house. The lender takes only credit risk. This creates an unequal relationship between lender and borrower.

Islam, on the other hand, encourages trade and the exchange of assets, where both parties share risks and rewards. Profit should come from genuine economic activity, not simply lending money.

How does riba appear in a mortgage?

Riba in mortgages becomes clear through their structure:

• Loan-based financing: You borrow money from a bank to purchase a property.
• Interest charges: Repayments include the loan amount (principal) plus additional interest.
• Debt contract: The agreement is debt-based, with your home used as collateral.

Since the bank’s profit comes directly from charging interest on money, this model does not comply with Islamic finance principles.

Shariah-compliant home finance options in the UK

Thankfully, Muslims in the UK have halal home financing options that avoid riba.

Diminishing musharakah (co-ownership)

• You and the Islamic bank purchase the property together.
• Your deposit determines your share, while the bank owns the remaining portion.
• Each month, you pay:
  • Rent on the bank’s share.
  • Acquisition payments to gradually buy out the bank.
• Over time, your ownership share increases until you own the property outright.
• The bank’s profit comes from rent, not interest.

While some Shariah scholars have approved this model, others have expressed reservations based on the fact that this model has the following parallels to conventional loans:

• Debt-based.
• Inadequate risk sharing by the bank.
• Rental pricing is benchmarked to interest rates.

Nonetheless, the Shariah scholars who permit Islamic mortgages often cite them as a necessary interim alternative to conventional borrowing until more Shariah-based products are available.

Murabaha (cost-plus financing)

• The bank buys the property on your behalf.
• It then sells it to you at a higher, pre-agreed price.
• You repay this price in fixed instalments.
• Profit is built into the sale price, not interest on a loan.

The Murabaha model is no longer used in the UK.

Pfida’s co-ownership model

Pfida offers a unique approach to Islamic home financing that is Shariah-based, flexible and affordable.

• Equity-Based Co-Ownership Model: there is no debt and ensures both parties share the financial risks and rewards.
• Affordability Through Simplicity: rent is completely de-linked from interest rates.
• Shariah Compliance at the Core: Based on the true to the essence of the Shariah principles found in the concept of Musharakah.

Pfida’s approach redefines home financing for Muslims and anybody else seeking faith-aligned, ethical and fair solutions.

All the above structures can align with Islamic finance principles, offering Muslims in the UK a path to homeownership without compromising on faith.

Choosing the right halal finance alternative

If you’re a Muslim looking for a halal home financing solution in the UK, diminishing musharakah provides a Shariah-compliant way to buy a home. It depends on your financial situation and long-term goals.

Always consult with suitably qualified Islamic finance experts or advisers to ensure you fully understand the structure, costs, and suitability of each option.

By taking the halal route, you can achieve the dream of homeownership while staying true to your values.