As traditional UK banks lose their appetite for lending, perhaps an alternative way of funding your next mortgage or remortgage will come from an Islamic Bank. 

The basis for all Islamic finance lies in the principles of the Sharia'a, or Islamic Law, and this form of finance is as old as the religion of Islam itself.  

The Islamic Bank of Britain have launched their Home Purchase Plan into the UK market.  It is available to both Muslim and non-Muslim borrowers and is based on the accepted and widely used Islamic financing principles of Ijara (leasing) and Diminishing Musharaka (reducing partnership).  For example, the bank may contribute 80% and you 20% of the purchase price.  Over a period of up to 30 years, you will make monthly purchase instalments through which the Bank will sell its share (80%) of the home to you.  With each instalment paid, the Bank's share in the property diminishes while your share correspondingly increases.

To make the transaction simpler to understand the Bank have published leasing rates.  These start at a rate which is fixed at 3.99% with only £299 of arrangement fees.  This is significantly better than the market leading traditional UK mortgage rate.

The Islamic Bank of Britain hope to encourage all types of borrowers to use their finance and have made their products available directly and through intermediaries.

The principles are that you in effect repay the debt plus you pay a percentage of the debt each year back to the Bank as payment for leasing the property from the Bank.  In effect they own say 80% of the property and it costs them say £100,000 to buy that share.  The Bank agree to sell you that share but charge you a lease for the privilege of you deriving benefit from the share of the property which they own. 

This way of lending money and having it repaid avoids interest charges and encourages borrowers to take a risk with their investment.  The Bank also holds the risk that the "loan" will not be repaid and they would have to sell the property.  As there is no interest chargeable this type of finance is able to be approved by the Sharia Supervisory Committee.

As mentioned above, whether you are Muslim or non-Muslim, this type of finance may appeal to you as a sustainable and cost-effective form of financing house purchases.  Your Independent Financial Adviser may already be au fait with the principles of Islamic Finance.  However, as this is an area which has not been frequently sold over the years it is likely your adviser will have a good basic knowledge of the principles but not the fine detail.  You may need to prompt your adviser to discuss the pros and cons of Islamic Finance prior to signing up for a mortgage.

An Independent Financial Adviser (IFA) will advise and recommend the most appropriate method for you to raise finance.

Kieron Bassett Financial Services have two IFAs.  Contact us on (01524) 832057, via e-mail, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it , or log onto www.kieronbassett.com/cms.

Adam Elkin CertPFS

5^Th April 2009