Specialist mortgages increase options for Muslims and green homeowners

The choice for Muslims looking for a home is burgeoning, and the options open to anyone looking for a green or ethical mortgage.

Britain’s two million Muslims can now browse from a selection of home financing options on the high street that comply with Islamic or sharia law. Banks are never slow to spot a lucrative market and lenders are keen to tailor specialist products to this prospective customer base.

“Britain is home to a large and fast-growing Muslim community, but many have found that their financial needs are not being serviced,” says Paul Sherrin, head of Islamic Financial Services at Lloyds TSB.

Home finance products that comply with sharia law are now available in every Lloyds TSB branch.

“We’re bringing Islamic banking into the mainstream and giving the Muslim community access to financial services that meet their needs without compromising their religion.”

Uptake has been excellent, he adds – the bank now offers a standard home finance product, one aimed mainly at first-time buyers, and a buy-to-let sharia-compliant product too.

Under Islamic law paying or receiving interest is forbidden, another reason why these are not mortgages, but called ‘home finance’ instead and are designed with the help of renowned Islamic scholars.

High-street lenders including Bristol & West and Lloyds TSB also offer a buy-to-let product.

“Until recently Britain’s Muslims have had no real choice in how they invest their money in keeping with their faith,” says Alison Pallett, head of consumer lending at Bristol & West, “and by offering a buy-to-let product that complies with Islamic law, we’ll be opening up many more possibilities for them.”

And having more high-street lenders offering Islamic home finance products is bound to be good news for borrowers,” says Ray Boulger, senior technical manager at brokers Charcol, “since it can help bring about increasingly competitive deals.”

What is Islamic home finance?

There are two types of sharia-compliant home financing.

In the case of muharaba the bank purchases the property and sells it on to the client at a higher fixed price with monthly payments spread over years.

Ijara mortgages are typically lease-based products, where bank owns the property through the payment term while the customer pays rent on a monthly basis to the bank.

The Arab Banking Corporation has launched its Alburaq product, which is being rolled out to high-street lenders to offer sharia-compliant home finance. Their diminishing musharaka product means that both bank and client contribute towards the cost of the home – say, 90 to 10 per cent each. Over 25 years, you make monthly payments to buy the bank’s share and the bank charges you rent, which is calculated according to the respective shares owned.

At HSBC, the first bank to bring Islamic financial services to the high street, the Amanah home finance product means that HSBC buys the property jointly with the customer, charging rent. Payments are monthly, at a current rate of 5.59 per cent, and capped, so can’t go over 2.5 per cent above the base rate.

Yet Muslim home finance products have typically been perceived as expensive, says Keith Leach, senior manager for Alburaq at ABC. “The products were a little more expensive in the mid-90s because of the nature of the product, but they have come down a lot of late,” says Leach.

Until 2003 Muslim home purchase incurred two sets of stamp duty, at the beginning and end of the finance period – the second transfer is now exempt. “The only real difference now is that you need two sets of solicitors, one for the bank and one for the client,” says Leach. “We have lobbied the government and the Law Society about this because we think it’s unfair, but they say that the nature of the actual contracts is sufficiently different for independent legal advice.”

There is a huge market out there, with Muslims making up around 3 per cent of the UK population. But there was initial wariness, says Leach. “In the last year or so things have taken off because people are more comfortable with the concept,” he adds. ABC now offers a discounted rate till September 2007, equivalent to 5.18 per cent on a conventional mortgage, and with solicitors’ fees and arrangement fees refunded too.

Green mortgages

However, would-be homeowners who want to follow their conscience with regard to the environment also have more choice these days.

The Ecology Building Society is one of Britain’s smallest but fastest-growing building societies, and offers ethical financial products. Borrowers building their own homes enlisting traditional or sustainable materials, or making a home extremely energy-efficient, often choose Ecology, which also lends for small woodlands and houseboat moorings. Owner-occupier rates start at 6.05 per cent, but are higher for non-residential purchases.

“Our mortgage rates are competitive, but it is fair to say that they will never top the “best buy” tables,” says Jenny Barton, marketing manager for Ecology, which won third prize in What Mortgage’s awards for the best value building society over ten years. “Rather than enticing new borrowers with upfront discounts and low initial rates, we aim to provide new and existing customers with long-term value for money. We do this by giving our borrowers a 0.25 per cent loyalty discount after the first two years of the mortgage, which applies for the remaining term.

“So, although our rates appear to be slightly higher, in the long run our mortgages are better value. Unfortunately most people are concerned with the initial interest rate and compare mortgages on this basis, rather than the overall cost. But Ecology isn’t your run-of-the-mill lender and doesn’t provide mortgages for standard properties. Instead it specialises in mortgages for properties and projects that benefit the environment – the renovation of a run-down property, conversion of a disused building or construction of a new Eco-home,” says Barton.

So what else is on offer when you choose to stand by your principles? Norwich and Peterborough green mortgages include discounted rates for newly built properties, at 5.24 per cent for four years and then rising to 6.49 per cent, N&P’s standard variable rate. N&P plants 40 trees for each green mortgage.

And if more lenders introduce green mortgages as energy-efficiency reports become part of HIPs, that could mean a better deal for borrowers,” says Boulger, who points to Co-operative Bank mortgages with attractive features and good rates too. The Co-op’s mortgages have ethical features including payments to ClimateCare, with rates starting at 4.74 per cent for a first-time buyer discounted product. “If your starting point is that you want the best green mortgage, the Co-op has some attractive products,” says Boulger, “and if you simply want the best deal, the Co-op will be in the frame some of the time too.”

But check out interest rates carefully, warns John Mawdsley, managing director of The Mortgage Partnership. “You could get a much better deal if you look at the whole marketplace, and use the difference to plant some trees yourself,” he cautions. There is still some way to go, it seems – but borrowers who want a decent deal and with a clear conscience now have more choice than ever.

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