Government Should Remove the Barriers to Islamic Mortgages
The Council of Mortgage Lenders is urging the Government to make it simpler and cheaper to provide Shari'ah-compliant mortgages. Although compliant mortgages already exist, various legal hurdles make them relatively expensive. But with three million UK Muslims, there is a significant potential market for Islamic mortgages.
The CML supports the efforts of the independent working party convened under the auspices of the Governor of the Bank of England and chaired by Andrew Buxton, former chairman of Barclays Bank, to highlight these issues and find ways to broaden choice in the mortgage market. Members of the working party and the CML will shortly be meeting with the Financial Secretary to the Treasury, Ruth Kelly MP, to seek ministerial support for implementing regulatory changes. They are calling for the Government to take steps to amend legislation where necessary to put Islamic mortgage finance on a more equal footing with conventional mortgages.
In Islam, the payment or receipt of interest is strictly forbidden. Islamic mortgages rely on the involvement of a financier who buys the property, and then sells it on to the buyer and collects instalment payments (similar to traditional mortgage payments) for the repayment of the capital. Instead of charging interest, the financier either sells the property on at a higher price, or sells it for the same price but then charges additional rent on the property for a specified period of time. One of the main problems is that Stamp Duty is therefore charged twice - as the ownership of the property transfers twice - once to the financier, and once to the ultimate buyer. This is necessarily reflected in the price of the mortgage finance.
The other significant problems are:
- Financial institutions are required to hold higher capital weightings on Islamic mortgages;
- It is not possible to use Right to Buy or the other home-ownership incentive schemes where an Islamic mortgage is used (because the financier is the original buyer and therefore does not qualify for the incentive); and
- State assistance with mortgage payments is not available in the event of financial hardship, because it is based on interest.
Andrew Buxton, chairman of the working group, commented:
"We know that there is pent-up demand in the UK for mortgage finance structured in accordance with Islamic principles. But the current hurdles make it more complex and expensive than it needs to be."
CML Director General Michael Coogan added:
"Regulatory changes would make it easier and cheaper for Muslims in the UK to get mortgage products which do not conflict with their beliefs. This would in turn help to make home-ownership more accessible and affordable for the UK's most significant religious minority."
For more information please visit www.cml.org.uk