Last reviewed: June 2026
TL;DR- Islamic mortgages avoid the payment of riba (interest), which is prohibited under sharia law, using alternative ownership and rental structures instead.
- The main structures used in the UK are diminishing musharakah (co-ownership), ijara (lease-to-own) and murabaha (cost-plus sale).
- Islamic home finance products are regulated by the FCA in the same way as conventional mortgages and are subject to the same consumer protection rules.
- UK providers include Al Rayan Bank, Gatehouse Bank, Ahli United Bank and some specialist Islamic finance providers.
Why Conventional Mortgages Are Not Sharia-Compliant
Sharia law prohibits riba, which is broadly understood as the charging or receiving of interest on money lent. A conventional mortgage charges interest on the outstanding loan balance, making it incompatible with sharia principles. Islamic home finance products are structured to achieve the same economic outcome - enabling a customer to purchase a property over time - without any element of interest. The finance provider generates a return through profit sharing, rental income or a markup on a sale price rather than through interest.
Diminishing Musharakah (Co-Ownership)
Diminishing musharakah is the most widely used Islamic home finance structure in the UK. The finance provider and the customer jointly purchase the property, each owning a proportion. The customer then pays rent to the finance provider on the provider's share of the property, and also makes regular capital payments that gradually buy out the provider's share. Over time, the customer's ownership proportion increases and the provider's decreases - hence "diminishing." When the customer has bought out the provider's entire share, they own the property outright. The rental element replaces the interest element of a conventional mortgage.
Ijara (Lease-to-Own)
Under an ijara structure, the finance provider purchases the property and leases it to the customer. The customer pays rent for the use of the property. At the end of the lease term, ownership transfers to the customer, either through a purchase agreement or a gift. The rent payments replace conventional mortgage interest payments. Some ijara structures include a separate diminishing musharakah element for the capital purchase.
Murabaha (Cost-Plus Sale)
Murabaha is a deferred sale structure where the finance provider purchases the property and immediately sells it to the customer at a higher, agreed price, payable in instalments over an agreed period. The difference between the purchase price and the sale price represents the provider's profit, and is agreed upfront rather than being a variable interest charge. Murabaha is more commonly used for shorter-term commercial transactions than for home purchase.
FCA Regulation and Stamp Duty
Islamic home finance products are regulated by the FCA as home purchase plans under the Regulated Activities Order, providing the same conduct protections as conventional mortgages. An important historical issue was stamp duty land tax: because the finance provider bought and then sold the property (in diminishing musharakah and murabaha structures), two SDLT charges could arise. The Finance Act 2003 introduced SDLT relief for Islamic home finance transactions to ensure they are taxed equivalently to conventional mortgages - only one SDLT charge arises.
Frequently Asked Questions
Is Islamic home finance more expensive than a conventional mortgage?
The total cost of Islamic home finance is broadly comparable to conventional mortgage costs, though the structure of charges differs. Instead of interest, the customer pays rent (in diminishing musharakah or ijara) or a markup (in murabaha). The rates used to calculate these charges are often benchmarked to market rates, meaning the total cost is similar. Some Islamic finance products have been slightly more expensive than equivalent mainstream products historically, though competition in the market has narrowed this gap. Comparing the total cost of credit across products rather than focusing on the headline rate is important.
Can non-Muslims use Islamic home finance products?
Yes. Islamic home finance products are open to anyone who wishes to use them, regardless of religious background. Some borrowers choose Islamic home finance for ethical reasons unrelated to religion - for example, a preference for a co-ownership structure or a distaste for interest-bearing debt. The products are assessed and regulated in the same way as conventional mortgages regardless of the customer's faith background.
Are Islamic mortgages available for buy-to-let properties?
Some Islamic finance providers offer buy-to-let products structured on Islamic principles. The availability is more limited than for owner-occupied Islamic home finance, and the criteria vary by provider. A specialist Islamic finance broker can identify current BTL product availability.
What happens if I miss a payment on an Islamic home finance product?
FCA conduct rules apply equally to Islamic home finance products. Missed payments are handled under the same forbearance framework as conventional mortgages - the provider must engage with the customer in difficulty and consider all options before enforcement. Providers may charge an agreed penalty for late payments, which must be donated to charity under sharia principles rather than retained as profit by the provider.
