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Fatwa CenterAlternative to Mortgage
Question
I live in the UK and would like to say some western banks and some Muslim owned banks have started offering Muslims an alternative to mortgage (loan with riba) to buy homes through a scheme called Ijara and Murabaha in the Murabaha contract I choose a house, the bank will buy it and sell to me for higher price, and I pay the higher price by equal installments of a fixed terms. The installments are fixed and will not alter throughout the payments term in the Ijara Contract I choose a house the bank will buy it for me and sell back to me for the same price spread over a term of up to 25 years; during this time I have to pay rent to live in the property plus payments towards the purchase price; the rent will be assessed yearly and will be adjusted to reflect the payments I have made. Is it allowed for us to use any of the methods above to buy homes to live in or for investment. May Allah Reward you.
Answer
Praise be to Allah, the Lord of the Worlds; and blessings and peace be upon our Prophet Muhammad and upon all his Family and Companions.
The first practice which you named "Murabaha" is permissible. The difference between the price of purchasing and selling does not have any effect on the legality of the transaction. Majority of the Muslim jurists permits an increase in rates against a delay in payment since the delay is part of the rate.
As for the second issue "Ijarah", i.e. selling a house and renting it to the purchaser for a known period, avoiding this practice is better since there are many prohibited acts in this dealing:
First, transactions should not be subjected to conditions as it is the case in the second affair, i.e. it is a "Conditional transaction". Imams Abu Hanifah and Shafie prohibit it. Those scholars who permit it do so on the condition that the sold item remains intact in the stipulated period which some scholars limit to one month only, others to more or less than one year. However, the period of twenty-five years is a long period, surely the sold object (the house) will have changed during that time.
Second, in the "Ijarah" (renting and selling) the whole price, or at least part of it, is unknown since selling the house on the purchased rate and renting it to the one who has purchased it means that the rent itself is part of the price of that house and that it is the profit that the seller gets from this transaction. The amount of this profit is not known at the time of the contract because the rent is assessed every year and adjusted against payments. Ibn Qudamah wrote in the book al-Shrh al-Kabeer selling a house and then giving it in rent for a month is illegal. When one sells a house the buyer owns its benefit; if the seller gives the house in rent that means the seller demands the benefits of the house which has already become the property of the buyer, so this practice is illegal.
Finally we advise our brothers to avoid the last transaction, i.e. Ijarah, since it contains the above mentioned forbidden things.
Allah knows best.
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