law of Islam prohibits the payment or receipt of interest, which means that
Muslims cannot use conventional mortgages. However, real estate is far too
expensive for most people to buy outright using cash: Islamic mortgages
solve this problem by having the property change hands twice. In one
variation, the bank will buy the house outright and then act as a landlord.
The homebuyer, in addition to paying rent, will pay a contribution towards
the purchase of the property. When the last payment is made, the property
Typically, this may lead to a
higher final price for the buyers. This is because in some countries (such
as the United Kingdom and
there is a
Stamp Duty which is a tax charged by the government on a change of
ownership. Because ownership changes twice in an Islamic mortgage, a stamp
tax may be charged twice. Many other jurisdictions have similar transaction
taxes on change of ownership which may be levied. In the United Kingdom, the
dual application of
Stamp Duty in such transactions was removed in the Finance Act 2003 in
order to facilitate Islamic mortgages.
An alternative scheme involves the bank reselling the property according to
an installment plan, at a price higher than the original price.
Both of these methods compensate the lender as if they were charging
interest, but the loans are structured in a way that in name they are not,
and the lender shares the financial risks involved in the transaction with