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What is the difference between Islamic mortgages and conventional mortgages

The difference between conventional and Islamic mortgages

For Muslims, one of the greatest financial challenges of our time, is purchasing a home without falling into riba (interest), which is strictly prohibited in Islam.

Conventional mortgages are based on interest-bearing loans, while Islamic banks and financial institutions offer alternatives that aim to comply with Shariah. Among these, the most widely used model in the UK is the Musharakah Mutanaqisah (diminishing partnership – الشركة المتناقصة). Understanding how these structures work, and how repossession differs in the case of default, is essential for anyone seeking a halal path to home ownership.

Conventional mortgages

A conventional mortgage is essentially a loan contract. The bank lends the borrower money to purchase a property, and the borrower agrees to repay it over time with added interest. This interest, or riba, is the main profit mechanism for the bank.

Allah says in the Qur’an:

وَأَحَلَّ اللَّهُ الْبَيْعَ وَحَرَّمَ الرِّبَا

“Allah has permitted trade and prohibited riba.” (Surah al-Baqarah 2:275)

In the event of default, the bank can repossess the property through the courts and sell it to recover the outstanding loan, including the principal, accumulated interest, and additional penalty fees.

If the sale value is less than the outstanding amount, the borrower remains liable for the shortfall. If it is greater, the surplus is returned to the borrower after costs. This system is debt-driven, legalistic, and profit-focused, with the borrower often carrying the greater risk.

Islamic home financing models

Islamic finance avoids riba by using sale, lease, or partnership-based contracts. In the home financing sector, three models are used:

  • Murabaha: the bank purchases the property and sells it to the customer at a higher price, payable in instalments. The profit margin is agreed upfront, so there is no interest.
  • Ijara: the bank buys the property and leases it to the customer. The customer pays rent, and ownership may transfer after the final payment.
  • Musharakah Mutanaqisah (diminishing partnership): both the customer and the bank purchase the property together, with the customer gradually buying out the bank’s share while paying rent for the portion still owned by the bank.

In the UK, the most common model is Musharakah Mutanaqisah. For example, if the customer contributes 20% of the purchase price and the bank contributes 80%, the two become co-owners. The customer then makes regular payments, part of which go towards rent for the bank’s share, and part towards gradually buying more of that share. Over time, the customer’s ownership increases while the bank’s share decreases, until the customer becomes the sole owner of the property.

Default and repossession in the UK context

If the customer defaults under a conventional mortgage, repossession is aimed at recovering the outstanding debt plus interest. By contrast, in an Islamic home purchase plan, repossession is linked to the ownership structure. The bank, as a co-owner, is entitled only to recover its remaining share of the property and any unpaid rent.

If the property is sold following default, the proceeds are divided fairly. The bank reclaims its share and any arrears, while the remaining surplus belongs to the customer. Crucially, the bank cannot add compounding interest or unjust penalties. Some Islamic banks may apply a late payment penalty to encourage timely repayment, but this is not treated as profit. Instead, it is usually donated to charity.

This reflects the prophetic warning against unjust enrichment through riba:

لَعَنَ اللَّهُ آكِلَ الرِّبَا وَمُوكِلَهُ وَكَاتِبَهُ وَشَاهِدَيْهِ

“Allah has cursed the one who consumes riba, the one who gives it, the one who records it, and the two witnesses to it.” (Sahih Muslim, 1598)

Risk-sharing and ethical safeguards

One of the distinguishing features of Islamic finance is that it incorporates an element of risk-sharing. In theory, the bank, as a co-owner or lessor, bears some of the risks related to ownership of the property. For instance, if the house were to be destroyed without negligence by the customer, an Islamic bank could not simply treat it as the borrower’s liability alone. Although in practice these risks are minimised by contract terms, the principle remains: the arrangement is framed around partnership rather than pure debt.

Another key safeguard is the treatment of surplus proceeds. In conventional banking, repossession can sometimes leave the borrower with further debt even after losing their home. In Islamic finance, once the bank’s entitlement is satisfied, any surplus from the sale must return to the customer. This reflects the Qur’anic principle of justice in dealings:

وَأَوْفُوا الْكَيْلَ وَالْمِيزَانَ بِالْقِسْطِ وَلَا نُكَلِّفُ نَفْسًا إِلَّا وُسْعَهَا

“Give full measure and weight in justice. We do not burden any soul beyond what it can bear.” (Surah al-An‘am 6:152)

The difference between conventional and Islamic mortgages is not only legal but ethical. Conventional mortgages are structured around lending with interest, repossession driven by debt recovery, and profit through compounding charges. Islamic home financing avoids interest, relies on partnership or trade-based structures, and ensures fairness by protecting the customer’s right to any surplus.

For Muslims seeking to avoid riba, Islamic home purchase plans represent a Shariah-compliant alternative. While both systems still involve serious financial commitments and the risk of repossession, the underlying contracts and ethical framework in Islamic finance are built upon justice, fairness, and the prohibition of exploitation.

Affordablity

House prices are so high now, that very few people can buy without taking credit. Interest based mortgages contain riba.  Yet, owning a house is a necessity. Some people argue that owning is not a necessity, as renting is an option. However permanently renting a house is a waste of money. Home ownership gives peace of mind and enables the Muslim ummah to be rooted and secure. An ummah which is struggling to pay rent and living in temporary accommodation cannot help itself let alone others.

In Surat Nahl we are told:

‘It is Allah who made out of the things He created, some things to give you shade; of the hills He made some for your shelter; He made you garments to protect you from heat, and coats of mail to protect you from your (mutual) violence. Thus does He complete his favours on you, that ye may surrender to His will (in Islam)’. (16:81)

From this we can see that shelter is one of the things Allah Almighty promised us.

Here are our options:

  • Research Islamic mortgages and if you can afford it, this is the best option. It may seem similar to conventional mortgages, however just as a halal chicken appears no different from a non-halal chicken, there is a world of difference between the. Similarly, the Islamic mortgage is halal.

The problem with Islamic mortgages is that there are limited providers and they often require a larger deposit which may make them inaccessible.

  • Ask family and friends for an interest free loan.
  • When you have exhausted these two possibilities, you may take out a conventional mortgage but try and minimise the level of interest. For example an off-set mortgage reduces the element of interest against your savings. Try and repay the mortgage as soon as possible.

Buying subsequent properties are not a necessity. Therefore taking out a mortgage to finance rental properties would be impermissible.

Shaykh Haytham Tamim 16th September 2025

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