Right-to-buy tenants to get option of Islamic mortgages

The government is to consult on allowing council tenants the right-to-buy their homes using mortgages which comply with Islamic law, it emerged yesterday.

Under right-to-buy rules, tenants are currently only able to use standard mortgages to purchase their homes. However, according to their faith, Muslims are not allowed to take standard mortgages as they go against Islam's sharia law, which forbids the paying or receiving interest.

The government is undertaking a three-month consultation with industry and the Muslim community in an effort to ensure its proposals tackle the key issues while still protecting consumers.

Yvette Cooper, housing minister, said the consultation paper was about giving tenants more choice: "The government wants to widen the choice available to tenants who want to buy their own home, whatever their faith.

"But we also need to make sure that tenants are not exploited by lenders or private companies in the process. That is why we are consulting on these proposals".

There are three kinds of homebuying products which comply with Islamic rules. The first, murabaha, allows ownership of a property to pass from the seller to the lender. The buyer then purchases it at a higher price, which the buyer repays over the term of the loan.

With the ijara system, ownership passes from the home seller to the lender, who remains the legal owner of the property until the loan is repaid. Finally, diminishing musharaka involves joint ownership between the lender and homebuyer. Each payment the buyer makes buys another part of the property.

Tenants choosing to buy with sharia-compliant mortgages would be able to buy their home at the same price and with the same discounts as they would with a standard, non-sharia mortgage.

Nizam Patel, halal finance consultant at 1st Ethical, a financial advice firm which specialises in sharia-compliant products, said that the proposals were good news for Britain's Muslim community.

"If these proposals are pushed through, they will have far-reaching consequences, not only for council tenants, but for key workers and professionals all over the country. People want to get onto the property ladder but have been unable to because they couldn't take a standard mortgage."

There are an estimated 1.8 million Muslims in the UK and several finance companies have launched sharia-compliant products. HSBC's Amanah Finance division offers an ijara homebuying product, the Ahli United Bank specialises in home-financing schemes and offers sharia-compliant funding for buy-to-let properties, and the Islamic Bank of Britain, which opened last August, plans to offer homebuying products later this year.