"Sharia-compliant mortgages carry higher costs due to distinct ownership structure"
Sharia-compliant deals tend to cost thousands more than a regular mortgage, according to brokerage Tembo.
But why is this and what is the role of a broker when it comes to Sharia-compliant mortgages? Mortgage Introducer reached out to an adviser to find out.
Why do Sharia-compliant deals cost more?
Steven Morris (pictured), advising director at Advantage Financial Solutions, said Sharia-compliant mortgages tend to carry higher costs due to their distinct ownership structure, often making them a niche market served by specialist lenders.
Moreover, only a limited number of lenders offer these specialised products, resulting in less competition, which contributes to more expensive lending terms.
“While they can be valuable tools for specific clients, it is crucial to compare them with conventional mortgages when requested by a client,” Morris said.
The unique nature of Sharia mortgages, Morris said, lies in their ownership structure, setting them apart from traditional mortgages and likely relegating them to specialised lenders.
“Despite the potentially higher costs, these mortgages play a significant role for certain clients; when a client expresses interest in a Sharia mortgage, a mortgage broker should diligently assess the scenario by comparing it with conventional mortgage options,” he said.
Determining the appropriateness of Sharia finance, Morris added, involves delving into the client’s religious beliefs and subjective interpretation of ‘interest’; the distinction in charging structures is noteworthy.
Morris said that Sharia mortgage costs are computed as an annual percentage charged on a monthly basis.
“While some view this as semantically different from conventional interest, others argue that the charging structure remains too similar to traditional interest-based mortgages,” he said.
The crux of the matter, Morris said, lies in the client’s level of religious orthodoxy and their nuanced opinion on the semantic differences in financial structures.
For some, Morris said the subtle distinctions justify opting for a Sharia mortgage, aligning with their religious principles.
On the flip side, he added that there are those who perceive the charging mechanism as not different enough from a standard interest-based mortgage, leading them to favour conventional options as they offer a lower interest rate.
What is the role of a broker with Sharia mortgages?
Mortgage brokers, Morris said, play a pivotal role in guiding prospective Sharia borrowers through this complex decision-making process.
“It is incumbent upon them to engage in meaningful conversations with clients, exploring their religious convictions and financial perspectives,” he said.
This, Morris added, ensures that clients are well-informed and empowered to make decisions aligned with their values.
In essence, Morris said the conversation surrounding Sharia-compliant mortgages extends beyond mere financial considerations.
“It intertwines with matters of faith, requiring a nuanced understanding of the client’s beliefs; mortgage brokers serve as facilitators in this dialogue, navigating the intricacies of religious orthodoxy and financial pragmatism,” he said.
In conclusion, Morris said that while Sharia-compliant mortgages may incur additional costs and involve a unique ownership structure, their significance for specific clients cannot be overstated.
The decision to opt for such financing, he said, hinges on a client’s religious convictions and their interpretation of financial semantics.
“Mortgage brokers bear the responsibility of fostering transparent and informed discussions, allowing clients to navigate the landscape of Sharia finance with clarity and confidence,” Morris said.
How important is the role of a broker with Sharia-compliant mortgages? Let us know in the comment section below.
