Buying a home with Islamic finance

What Islamic home finance is

Islamic home finance lets you buy a home in a way that follows Islamic (Sharia) principles, which do not allow interest to be charged or paid. Instead of lending you money at interest, the finance provider takes part in the purchase itself, and you pay it through rent and payments for its share, or through instalments of an agreed price.

Providers of Islamic finance for the homes people live in are regulated by the Financial Conduct Authority, and many of their plans are called home purchase plans. They are offered by specialist banks and other providers, and you do not need to be Muslim to use one.

The main kinds of plan

• Ijara: the provider buys the home and leases it to you. You pay rent for living there and, usually, payments towards buying the home, and at the end of the plan it passes to you.
• Diminishing Musharaka: you and the provider buy the home together. You pay rent on the provider's share and buy that share a little at a time, so your share grows until you own the whole home. In the UK it is often combined with Ijara.
• Murabaha: the provider buys the home and sells it straight on to you at a higher, fixed price, which you pay in instalments.

Your provider's documents say which kind your plan is and how its payments work. Ask your provider to explain anything you are unsure of before you apply.

What your conveyancer does

The conveyancing follows the same route as any purchase: checks on you and your money, the title, searches, enquiries, exchange and completion. On top of that, your conveyancer:

• reviews the provider's offer and the documents for your plan, such as a lease or an agreement for owning the home together, and explains them to you
• explains who owns the home during the plan, and how your part is recorded and protected at HM Land Registry, or with Land and Property Services in Northern Ireland
• meets the provider's requirements and reports to it, as a conveyancer does for a mortgage lender
• works with the provider's own law firm, where one acts for it

That extra work is why a quote for buying with Islamic finance includes an admin fee of its own.

Stamp Duty Land Tax and Land Transaction Tax

Because the provider may buy the home and then lease or sell it to you, there could be two charges to property tax. The law gives relief for alternative property finance so that you pay the same tax as you would buying with a mortgage: for Stamp Duty Land Tax in England and Northern Ireland under the Finance Act 2003, and for Land Transaction Tax in Wales under the Land Transaction Tax and Anti-avoidance of Devolved Taxes (Wales) Act 2017.

Your conveyancer checks that your plan meets the conditions, and how first-time buyer relief or the higher rates for additional homes apply to you, then files the return. Our stamp duty calculator gives an estimate, and our property tax guide explains the rates.

Choosing a conveyancer

Many providers work only with conveyancers on their own panel, and some have a separate law firm act for them, whose fees you may be asked to pay. Before you instruct anyone, ask your provider:

• whether your conveyancer must be on its panel
• whether it has a law firm of its own, and who pays that firm's fees
• how long its offer lasts, and what happens if completion is delayed

Name your provider when you ask for a quote, so we can introduce you to a law firm that fits.

What it costs

A quote for buying with Islamic finance has the usual legal fee, an Islamic finance admin fee for the provider's documents and process, at least £650 plus VAT (at least £780 including VAT), and the fee for acting for your provider, plus disbursements such as searches and HM Land Registry fees. Each is on its own line, so you can see what you pay for and why. Our guide to understanding a conveyancing quote explains each part.

Next steps

Speak to your provider early, as Islamic home finance has its own application and valuation. Then get an itemised Islamic finance purchase quote, or read about the Islamic finance purchase service. Our conveyancing process guide shows every step of a purchase.