Islamic home finance, sometimes known as shariah finance, Islamic mortgages or Islamic conveyancing, is becoming increasingly popular among home buyers, but still remains a niche specialist area of residential conveyancing.
Associate Director, Jennifer Prysiaznyj, who is also head of Woodcocks Haworth and Nuttall Solicitors’ residential conveyancing team and an expert in this field, answers some of the most frequently asked questions on the topic.
What is Islamic home finance?
Islamic home finance is a way of funding a property purchase that is deemed to be shariah compliant by a Shariah Advisory Board. In Islam, the payment of interest (riba) is forbidden (haram), therefore a conventional mortgage would be a breach of Islamic beliefs.
There are several different methods of Islamic home finance. However, the most popular is diminishing musharakah (joint ownership), coupled with an ijara lease. In this scenario, the bank purchases the property on the customer’s behalf and simultaneously grants a lease back to the customer.
The beneficial interest in the property is split between the bank and the customer in accordance with the percentage of home finance obtained.
Over the agreed financial term, the customer will repay the amount together with rent on the share owned by the bank. As each monthly payment is made, the bank’s share in the property decreases and the customer’s increases.
To put it simply, interest is replaced with rent to ensure that the product is shariah compliant.
Who is Islamic home finance suitable for?
Islamic home finance is available to anyone planning to purchase a property. It is an ethical alternative to a conventional mortgage. Many expatriates and buy-to-let investors also find that the rental rates available are quite competitive.
As well as purchasing property, Islamic home finance is available for re-mortgages.
How does the conveyancing process differ in an Islamic home financed property?
When conveyancing a property purchase that is made using Islamic home finance, the key difference to the customer is that there are two sets of solicitors involved. As the transaction creates a landlord and tenant relationship, it is not appropriate for the same solicitor to represent both parties due to a potential conflict of interests.
Therefore, a solicitor acts for the bank, with a different solicitor acting for the customer. Once the customer’s solicitor has completed their due diligence, the bank’s solicitor quality checks the work and once satisfied, will release the finance.
What happens if the customer wishes to repay the finance?
In an Islamic home finance arrangement, the customer is free to repay the finance at any time. As with many financial products, there are no penalties for doing so. When the customer is in a position to repay the finance, whether via a sale, re-mortgage or lump sum final payment, they need to appoint a solicitor to deal with the transaction.
Once the finance has been repaid, the property is wholly transferred to the customer and the lease is surrendered. The transfer and lease surrender needs to be registered at HM Land Registry. It is advisable at this point of the transaction, that the customer to appoints a specialist Islamic finance solicitor to manage the registration on their behalf.
Does Islamic conveyancing take longer and cost more than conventional conveyancing?
It is a common myth that Islamic conveyancing will take a long time and cost a lot more than conventional conveyancing. This doesn’t necessarily have to be the case. Although, the process will inevitably take a little bit longer due to the involvement of two sets of solicitors, if the customer appoints a specialist solicitor, the timescale should not be much different than with a conventional mortgage.
The legal costs incurred may be a little higher due to the involvement of two sets of solicitors, however, some banks offer a contribution towards legal fees if a solicitor that specialise in Islamic home finance is instructed. Therefore, any additional legal fees are kept to a minimum.
The government has also introduced legislation to ensure that no additional Stamp Duty Land Tax (Land Transaction Tax in Wales) is incurred when using Islamic home finance than with conventional mortgage finance. It is therefore essential to appoint a firm of solicitors who specialise in the field, to ensure a smooth conveyancing process.
Al Rayan Bank Plc and Gatehouse Bank Plc which offer Islamic home finance, both recommend WHN Solicitors as a legal firm with expertise in this area.
Jennifer Prysiaznyj is an Associate Director and head of WHN’s residential conveyancing team. She has acted for customers buying, re-mortgaging and selling properties through Islamic home finance since the financial products were first introduced almost 20 years ago. Jennifer has developed an international client base due to her depth of knowledge and experience in this field.
Should you wish to discuss using an Islamic home finance product for the purchase of your home, or would like to obtain a conveyancing estimate, please contact Jennifer on 01254 272640 or email Jennifer at jennifer.prysiaznyj@whnsolicitors.co.uk
