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Imagine a mortgage lender who allows you to take all the increase in the price of your home when you sell, but is prepared to share any loss if the property has fallen in value.
Such a deal may seem too good to be true in the current property market, but it is exactly what banks specialising in Islamic home loans are offering.
Islamic mortgages have been in the mainstream market for years but it can often be difficult to get to grips with Sharia-compliant financial products, which can seem confusing to new-comers.
In Islam, making money from money by charging interest is deemed unfair and is not permitted. So where do you start when choosing an Islamic mortgage?
There are three models of Home Purchase Plans (HPPs): Ijara, which means 'lease' in Arabic; Musharaka, which means 'partnership'; and Murabaha, meaning 'profit'. Depending on the model, the lender will levy rent or add profit to the amount you pay back instead of charging interest.
An Ijara is a lease-to-own HPP: the bank purchases the property you want then leases it out to you. At the end of the term the bank transfers ownership of the property to you.
Under a Musharaka plan (also known as 'diminishing Musharaka'), you buy the property jointly with your provider and gradually buy the bank out of it. So if you put down 10 per cent of the purchase price, the bank will buy the remaining 90 per cent. You pay the bank monthly rent on the share you don't own as well as buying more shares in the property with each monthly payment, with a view to owning the property outright at the end of the term - hence the 'diminishing' nature of the partnership.
The more shares you own, the less rent you pay to the bank, and the cost of a share in the property is based on the property's original cost price, not its market value.
In a Murabaha plan, the bank will buy the property you want then immediately sell it on to you for a profit. You then pay fixed monthly repayments on the higher price, but with no interest to pay back to the bank. So the bank might buy a property that costs BD200,000 and sell it on to a customer for BD250,000; the customer then pays that sum back over a fixed term.
It might be argued that charging rent or making a profit is no different to charging interest, in that ultimately the providers still make money - but as Islamic finance experts explain, it is how that money is made that is the underlying difference between Islamic mortgages and conventional ones.
Farrukh Raza from Islamic Finance Advisory and Assurance Services, an independent consultancy, said: "The issue isn't with making money, it's the conditions in which that money is made. So instead of making money through interest, Islamic banks will make money through profit or through rent when the bank owns the property as an asset. It is important to remember that Islamic mortgages simply offer an alternative financing structure which gives customers different options - it's not a zero per cent deal to buy your house for nothing."
Since there are no interest rates to compare between different Islamic mortgages, what should house buyers look for when choosing an Islamic finance provider and home purchase plan?
The HSBC bank's Islamic finance arm is called HSBC Amanah. Sales quality manager, Nader Kamel, says people should consider how much flexibility they need and how much it will cost them to take out the financing. "Are there any fees? Can you make lump sum payments? Can you rent out the property? How much rent is the bank charging you?" he said.
HSBC Amanah started off offering Ijara plans but now offers diminishing Musharaka instead. Kamel says: "We found customers were a little uncertain about the bank owning the property in full and only transferring it into your name at the end of term (as happens in Ijara plans), but with diminishing Musharaka, you are co-owners with the bank from the start. The knowledge that every month you are increasing your share of the property and sharing all risks with the bank, is more reassuring to customers."
Some Islamic finance experts concede that such home deals may work out to be more expensive than conventional mortgages, but sometimes there is not much difference between them.
Islamic finance products are not just for Muslims - around two per cent of the IBB's customer base are non-Muslim and don't choose the bank for religious reasons, but for ethical ones. Islamic banks will not invest in firms involved with gambling, alcohol, tobacco or pornography.
The UK, for example, now has a growing number of home-buyers choosing Sharia-compliant mortgages. Sultan Choudhury, commercial director at the Islamic Bank of Britain (IBB), the UK's first Islamic bank, said: "Our products are open to everyone and customers who aren't Muslim choose the bank because of its ethics. Because of the nature of our investments, we are an ethical provider, and, increasingly, that is what people want."
