Islamic Mortgages — What Types of Contracts are Used?
Reading about different Islamic financing methods, I was interested in the use of diminishing musharakah contracts (musharakah mutanaqisah) for the financing of mortgages. Wanting a clear but simple to understand guide, I found the embedded video below from the CEO of Islamic Finance Guru (IFG) on YouTube. However, although the video is well put together and easy to understand, it deals primarily with the UK market, and has a potential bias in that IFG has created an investment platform which invests in StrideUp, a mortgage provider.
The video segment entitled “How do Islamic Mortgages Work?” discusses the three common types of mortgages, of which diminishing musharakah-based mortgages are the most common for residential purchases. Between 1:57 and 3:54, Khan gives a very clear description of how musharakah-based mortgages work, describing how rent is paid to the bank in proportion to the percentage of the property it owns, and how this rent decreases as the client slowly buys out the bank’s share in the property. I highly recommend watching this segment.
