Islamic home finance vs interest-based mortgage

Choosing a halal path to UK homeownership

Buying a home is one of the biggest financial choices most of us will make. For many in Britain, that decision now includes an ethical question: should you choose a Sharia-compliant route that avoids interest, or a conventional interest-based mortgage? The good news is the UK market is maturing quickly, with more providers, clearer rules and products that can suit first-time buyers, families, expats and ethically minded non-Muslims alike.

Islamic finance in the UK is growing steadily. Sector value is projected to reach around £7 billion by 2029, supported by strong consumer demand among British Muslims and growing interest from non-Muslim consumers who value asset-backed, socially responsible finance. Banking assets in Islamic institutions have also surged, and London’s role as a global hub is reinforced by the London Stock Exchange’s leadership in sukuk listings. Together, these trends are making Sharia-compliant home finance more accessible and competitive.

Despite that momentum, penetration remains low. Only a few thousand Islamic home purchase plans are currently outstanding, highlighting significant room for growth. Recent changes to UK tax rules from October 2024 have removed previous hurdles, aiming to put Islamic arrangements on a more level footing with conventional mortgages. In 2025, the Treasury began consulting on barriers within consumer credit laws, with the intention of improving inclusive access and reducing unnecessary friction for Sharia-compliant products.

On the ground, choice is widening. Gatehouse Bank offers home purchase plans up to 95 percent of property value, with options that can stretch to higher property prices and green discounts for energy-efficient homes. Other providers and fintechs are entering the space, focusing on first-time buyers and simplifying documentation. Younger buyers, particularly Gen Z British Muslims, are also showing rising interest in ethical products that align with their values while still providing a clear path to ownership.

Ethical does not mean expensive - it means transparent, asset-based and aligned with your values.

This guide sets out how Islamic home finance compares with interest-based mortgages in the UK, what it costs, who might be eligible, and how the process works. Our aim is to help you make a clear, confident decision in line with your budget and beliefs.

Who benefits from this guide

If you want to own a home in the UK and prefer a finance option that avoids interest, this guide is for you. It will also help if you are an ethical buyer who values asset-backed structures, even if you are not Muslim. First-time buyers, movers, remortgagers, and British expats purchasing in the UK can all find relevant routes here. We explain the practical differences between Islamic home purchase plans and conventional mortgages, what lenders look for, and how the numbers may compare. If you are unsure where to start, you will find a simple step-by-step pathway below.

Your main routes at a glance

1. Diminishing Musharaka HPP - shared ownership with gradual buy-out and rent on the bank’s share.
2. Ijara HPP - bank buys the property and leases it to you, with purchase at term end.
3. Murabaha HPP - cost-plus sale where the price is fixed over the term, no variable interest.
4. Conventional repayment mortgage - interest-based loan with fixed or variable rates.
5. High LTV options - up to 90-95 percent, including selected Islamic providers.
6. Green-linked products - potential discounts for energy-efficient homes and retrofits.
7. Expat-friendly structures - tailored HPPs and documentation for overseas income.

Money matters - what to expect

Who is likely to qualify

Eligibility is broadly similar across Islamic and conventional routes. Lenders will check identity, UK residency or visa status, income stability, outgoings and credit history. For Islamic home purchase plans, providers also assess the property’s suitability under Sharia oversight and require a legal structure where you and the provider become co-owners or enter a defined sale or lease agreement. Affordability tests consider both acquisition payments and any rent component.

Deposits of 5-20 percent are typical, with some Islamic lenders offering up to 95 percent loan-to-value for strong applicants. Self-employed buyers can apply with two or more years of accounts, though some may accept less with additional evidence. British expats buying in the UK should expect enhanced checks on overseas income, currency stability and local tax considerations. Properties should be standard construction, with clarity on lease terms, service charges and ground rent for flats. You will also need a solicitor experienced in Islamic structures to ensure the documents are correctly executed.

If you are comparing options, a whole-of-market broker can help you weigh costs and criteria. If it suits your situation, Kandoo can introduce you to regulated advisers and lenders who understand both Islamic and conventional products, so you can review suitable choices side by side.

From enquiry to keys - step by step

1. Define your budget, deposit and monthly comfort zone.
2. Gather payslips, accounts, ID and UK address history.
3. Obtain an agreement in principle from your chosen provider.
4. Instruct a solicitor experienced in Islamic HPP documentation.
5. Offer on a property, subject to valuation and suitability checks.
6. Complete underwriting and property valuation or survey.
7. Review contracts, Sharia documentation and final offer terms.
8. Exchange contracts, complete purchase and begin repayments.

Weighing it up

Look closely before you commit

Take time to read every document. With Islamic home purchase plans, check how rent on the provider’s share is reviewed, what happens to payments if the profit rate moves, and the cost of early acquisition or early settlement. Ensure your solicitor is comfortable with HPP structures and leasehold specifics, especially ground rent and service charges. Recent UK tax changes from October 2024 were designed to remove historic disadvantages for Islamic structures, but you should still confirm how they apply to your transaction. The 2025 government consultation on consumer credit rules is ongoing, so product terms and availability may evolve. Finally, consider insurance, maintenance costs and a realistic emergency fund so you can manage unexpected expenses without stress.

Alternatives to consider

1. Save for a larger deposit to reduce monthly costs.
2. Shared ownership schemes via housing associations.
3. Lifetime ISA to boost first-time buyer deposits.
4. Rent-to-buy or gradual purchase arrangements.
5. Family-assisted options or springboard products.
6. Remortgage later to a more competitive HPP or mortgage.
7. Ethical building society products if suitable for your needs.

Your questions answered

Q: What makes an Islamic home purchase plan halal? A: It avoids interest by using asset-based contracts such as shared ownership, leasing or cost-plus sale. You pay rent or a pre-agreed profit rather than interest on a loan.

Q: Are monthly payments higher than a conventional mortgage? A: It depends on deposit size, product type and market pricing. At high LTVs, costs can be similar or slightly higher. Green discounts and competitive providers can narrow the gap.

Q: Can non-Muslims apply for Islamic products? A: Yes. Many non-Muslims choose HPPs for ethical or asset-backed reasons. Providers focus on affordability and property suitability, not religious status.

Q: How are profit rates set and reviewed? A: Providers usually link profit rates to a public reference such as SONIA and review at agreed intervals. Fixed options may be available for defined periods.

Q: What if I miss a payment? A: Speak to your provider immediately. Forbearance options may include payment plans or term adjustments. Missed payments can affect your credit and may lead to repossession as a last resort.

Q: Are deposits and agreements protected by FSCS? A: Savings with UK banks may be FSCS-protected up to the limit, but home finance agreements themselves are not savings. Check your provider’s specific protections and authorisation.

Q: Can I switch from a conventional mortgage to an HPP? A: Many buyers refinance into an HPP when their fixed term ends. Compare total costs, fees and solicitor work required, and confirm any early repayment charges on your current deal.

Ready to move forward

If you want a clear view of both routes, Kandoo can connect you with regulated advisers who compare Islamic home purchase plans and conventional mortgages across the UK market. You will receive guidance in plain English, transparent costs and next steps tailored to your budget and goals.

Important information

This guide is for general information only and is not personal advice. Product availability, rates and eligibility can change. Always seek regulated advice before committing. Your home may be repossessed if you do not keep up repayments.