What Is a Halal Mortgage?

A halal mortgage is a form of financing that may not flout Islamic prohibitions on the concept of paying interest on a loan. Two main forms of halal mortgages exist, Ijarah and Musharakah. Both employ the concept of leasing a property from a bank instead of the traditional form of mortgage in the Western hemisphere, in which home owners pay back part of a loan as well as monthly interest. Halal mortgages are approved by some Islamic authorities but unapproved by others.

Islam prohibits devout followers from either receiving or paying interest on loans. In countries such as the United Kingdom, this poses a problem for prospective home owners. Traditionally, mortgages from banks in Western countries involve the payment of interest on a loan.

Certain banks now cater to Muslims who want to conform to Islamic law and not pay interest and offer a financial product called a halal mortgage. Halal is an Islamic word that means permissible. Some religious authorities interpret Islamic law to mean that these products are permissible, but some judge the halal mortgages as haram, or forbidden.

Ijarah is one form of halal mortgage. In this form of financial product, the bank buys the house and becomes the owner. The holder of the mortgage then pays the bank a portion of the purchase price each month. He or she also pays rent each month to the bank, which represents the bank's profit on the halal mortgage.

Musharakah is a product where the bank buys only a part of the house, and the prospective home owner buys the rest. The profit to the bank derives from the rent payment the applicant makes to the bank until the period of rental ends. The bank, in these cases, owns only part of the house from the beginning.

Some Muslims living in countries that are not under Islamic law break the religious rules forbidding interest payments in order to get mortgages to finance homes. More devout people may wait until they have earned the price of the house in cash and then buy it outright. Bank accounts usually offer credit interest on current or savings accounts or apply interest to services such as overdrafts, so devout Muslim people may not have them. Another potentially problematic financial product is a credit card, which also involves the payment of interest.