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Mortgage loans conforming to Sharia law are there - and they are not only for Muslims | Money
Think of a mortgage provider who allows you to take the entire rise in the cost of your home when you are selling, but is willing to split any losses if the value of the home has lost. It may seem too good a business to be real in the present real estate markets, but it is exactly what a fistful of specialist Muslim mortgage lenders offer.
Muslim mortgage loans have been on the UK mains stream for several years, but it can often be hard to deal with Sharia-compliant finance which can be a source of confusion. Islam considers it unjust and not allowed to earn cash with interest. So, where do you begin selecting an Islamic mortgage?
Murabaha, which means "profit"; Ijara, which means "leasing" in Arabic; Musharaka, which means "partnership"; and Murabaha, which means "profit". According to the type of mortgage, the creditor charges rental or adds profits to the amount you repay instead of calculating interest. A Ijara is a rental agreement with its own HPP: the local banks buy the desired real estate and then let it to you.
Upon expiry of the lease period, the transfer of title to the real estate will take place. As part of a Musharaka scheme (also known as a "declining Musharaka"), you buy the real estate together with your vendor and buy out the bench step by step. So, if you put down 10 percent of the sale value, the other 90 percent is bought by the state.
By paying the bank's montly rental fee on the portion you do not own, you buy more stakes in the real estate with each month's rental to fully own the real estate at the end of the lease period - hence the "declining" character of the relationship. So the more stocks you own, the less rental you are paying to the banks, and the costs of a stake in the real estate are calculated on the basis of the initial purchase value of the real estate, not the fair value.
Under a Murabaha scheme, the Murabaha estate agent buys the desired real estate and immediately sells it to you for a return. In this case, you make firm payments on the higher rate, but without interest, which you have to repay to the banks. For example, the dealer could buy a £200,000 piece of real estate and resell it to a client for 250,000; the client would then repay this amount over a specified period.
One could argue that the collection of rents or profits is no different from the collection of interest because the suppliers are still making cash in the end - but as Muslim financial analysts say, it is the way this cash is earned that makes the fundamental distinction between Muslim and traditional mortgage loans.
The Farrukh Raza of the Islamic Finance Advisory and Assurance Services, an independant consulting firm, says: "It's not about making a living, it's about the terms on which that living is made. So, instead of earning cash through interest, Muslim bankers will earn cash through profits or by renting if the institution own the real estate as an assets.
It' s important to recall that Islam mortgage loans just provide an alternate funding option that offers various choices to Muslims - it's not a 0 percent free mortgage to buy your home. HSBC has been providing Sharia-compliant residential mortgage lending for five years through its HSBC Amanah Islamic lending division, while Arab Banking Corporation has its own HPP line of Arab Banking Corporation products known as Alburaq, also available through Lloyds TSB (acquired from Bristol & West).
The Ahli United and United National banks also provide the UK with their own set of Treasuries, and the IBB, the country's first Islam based institution, is releasing its own set of Treasuries this weekend. HPP sales fell under the Financial Services Authority's regulations last year, giving clients the same level of security they would get if they took out a traditional mortgage.
As there are no interest tariffs to choose from to make comparisons between different types of mortgage, what should you consider when selecting an Islam financial services company and a home buying scheme? As Nader Kamel, HSBC Amanah's HSBC Product Management Consultant says: "You should consider how much agility you need and how much it will take you to complete the funding.
Could you let the real estate? What does the bench charge you for your rental? HSBC Amanah began to offer Ijara schemes, but is now proposing Musharaka reduction instead. Camel says: "We have found that clients were a little unsure whether the banks own the entire real estate and only transfer it on your behalf at the end of the lease period (as is the case in Ijara's plans), but with the decline of Musharaka you are co-owner of the banks from the beginning.
Knowing that you are raising your stake in the real estate every single months and that you are pooling all your risk with the banks is more comforting for them. However, some Muslim financial analysts admit that such home loans may be more costly than traditional mortgage loans, but sometimes there is not much distinction between them.
When you purchased a £250,000 home with a declining Musharaka scheme from HSBC Amanah, you would be paying around 1,553 per month per annum (consisting of 1,246 pounds rental and 307 pounds contributions to raise your share) on the basis of a 90 per cent purchase from the banks and a 10 per cent deposit.
When you took out a traditional two-year firm instalment loans with HSBC (at 6. 29 per cent and with a 799 fee) on 250,000, you would be paying around 1,655 pounds a months over 25 years. When you decide on an HPP that involves rental payment, you should ask the provider what the rental and management will be.
The Libor Index is used by all UK financial institutions as a yardstick for lease payment and rents are checked every six-month. HSBC Amanah and the IBB calculate lease as 6. 95 percent of the funding contracted with them (that is, 6. 95 percent of the portion that you do not own, not 6.
95% interest). Rents 76 percent on its commodity housing product, 6. 56 percent on its reduced budget (to March 2009) and 6. of 49 percent on their firm target (also until March 2009). Lease price percentages are the same regardless of the real estate's dimensions, locations and value.
However, management fees are lower than for a traditional loans; HSBC Amanah calculates an entry fees of 275, while IBB and Alburaq require 299. Suppliers check whether you can purchase the mortgage in the same way as with a traditional mortgage, and if it is authorized, you can basically get the mortgage equivalents.
Islam financial services are not just for Muslims - around 2 percent of IBB's client list are non-Muslims and select the firm for ethic rather than religion purposes. Muslim banking will not be investing in companies related to gaming, liquor, tobacco trafficking or adult entertainment. Commenting on the decision, Sultan Choudhury, Business Manager of ICT, said: "Our product is open to everyone and non-Muslim clients select the EIB for its code of conduct.