Islamic mortgage or conventional mortgage: what actually differs
One difference, and everything else follows from it: who owns the property while you pay for it. With a conventional mortgage you own it from completion and the lender holds a charge. With a home purchase plan the provider buys the property, or a share of it, and you acquire that interest over the term while paying rent on the part you do not yet own.
This page is about the structure. Whether Islamic finance costs more is a separate question with a measured answer, and it lives on the cost comparison rather than being asserted here.
The one real difference
Set an Islamic mortgage vs conventional mortgage side by side and almost everything matches until you ask who holds the title. A mortgage is a debt with security attached. You buy the property, the lender lends you money to do it, and the lender registers a charge so it can recover the money if you stop paying. Your name is on the title from day one and the debt sits against it.
A home purchase plan is not a loan. The provider acquires an interest in the property and you are obliged to buy that interest over an agreed period, living in the home throughout. Where the provider buys an undivided share rather than the whole thing, the share is held on trust for you and the provider as beneficial tenants in common. Those conditions are set out in article 63F of the Regulated Activities Order and they are what make it a regulated home purchase plan rather than something else.
That single change, from lending against a property to owning part of it, is what produces every other difference below. It is also why the two can be compared at all: the payment does the same job on both sides, and the published rate sets the price on both sides.
The whole comparison in one line
A conventional mortgage lends you money against a home you already own. A home purchase plan buys the home with you and sells you its share back.
Everything below is a consequence of that. Nothing below is about price, which is measured on the cost comparison.
Structure, side by side
A conventional repayment mortgage against a mainstream UK home purchase plan. No price rows: those are measured separately.
| Question | Home purchase plan | Conventional mortgage | Why it differs |
|---|---|---|---|
| Who owns the property | The provider buys the property, or an undivided share of it, and you acquire that interest over the term. Where a share is bought it is held on trust for you and the provider as beneficial tenants in common. | You own the property outright from completion. The lender has no ownership interest, only a charge registered against it. | This is the difference every other row follows from. |
| What secures the finance | The provider’s own ownership interest. There is no loan to secure. | A legal charge over your property, securing the debt. | A mortgage is a debt with security. A home purchase plan is a co-ownership arrangement with an obligation to buy. |
| What the monthly payment is | Rent on the share you do not yet own, plus an acquisition payment that buys more of it. The rent element falls as your share grows. | Interest on the outstanding balance, plus capital repayment. The interest element falls as the balance drops. | The shape of the payment is similar. What is being paid for is not. |
| What the published rate sets | The rent. Providers call it a rental rate or profit rate. | The interest. | The rate plays the same pricing role in both, which is why the two can be compared at all. |
| What happens at the end of the term | You have acquired the provider’s whole interest and own the property outright. | The debt is repaid and the charge is removed. | Same destination, reached by transferring ownership rather than by discharging a debt. |
| What happens if you fall behind | MCOB 13, the FCA’s arrears and repossessions chapter, applies to a home purchase provider "as for a mortgage lender", and the regulator expects a sale shortfall to be treated the same way as a payment shortfall. | MCOB 13 applies to the lender. | The conduct protections in arrears are deliberately aligned. This is the row most people assume differs and it largely does not. |
| Whose interests the rules protect | A firm must ensure the customer’s interests under a home purchase plan are protected to a reasonable standard, which the rules apply to the right to occupy, the interest you acquire being unencumbered by third-party interests, what happens if the provider fails or transfers its interest, and what is entered on the land register. | You already hold the title, so the equivalent questions do not arise in the same form. | The extra rules exist because you are acquiring an interest rather than holding it from day one. |
| Stamp duty | One charge. HMRC relief for alternative property finance exists so that the provider acquiring the property does not create a second one. | One charge. | A structural difference that deliberately produces no difference in outcome. |
| Moving house during the term | Not established. Whether an arrangement can be transferred to a new property, and what that does to an early settlement charge, is a question for the provider. | Many mortgages are portable, subject to the lender’s criteria. | We have not verified portability terms for the providers we track, so we are not going to describe them. |
Sources: Regulated Activities Order 2001, article 63F; FCA Handbook, MCOB 13.1; MCOB 2.6A; HMRC SDLTM28005. All read .
What is the same, and it is most of it
The structural difference is real and it is narrow. Almost everything about buying a house happens identically either way, which is worth saying because the anxiety usually attaches to the wrong things.
- Affordability, credit history and the property itself are assessed before you are offered anything.
- A valuation is carried out for the provider or lender, not for you.
- A survey is optional and separate, and costs the same either way.
- Conveyancing happens on any purchase, though the arrangement can differ by provider.
- The deposit is the same money. It becomes your opening ownership share rather than the part of the price nobody is lending you.
- Property tax follows the purchase, so a first-time buyer pays what any first-time buyer pays.
Terms run 5 to 40 years and 7 to 40 years on the products we hold, which is the same range a conventional lender would offer. You can generally overpay. There is an early settlement charge during the initial period on most products, exactly as there is on a conventional fix.
The protections, which are closer than most people expect
This is the row people get wrong most often. Entering into and administering a home purchase plan are regulated activities, and the FCA's arrears and repossessions rules apply to a home purchase provider as they do to a mortgage lender. The regulator also expects a firm to treat a sale shortfall the same way it treats a payment shortfall.
There are additional rules that exist precisely because you are acquiring an interest rather than holding it from the start. A firm must ensure your interests under the plan are protected to a reasonable standard, and the rules point at four things in particular: your right to occupy the property throughout the term; the interest you retain or acquire being unencumbered by third-party interests; what happens if the provider fails or transfers its interest to someone else; and what registrations, restrictions or notices are entered on the land register, when, and by whom.
The question worth asking a provider
What is entered on the land register, when, and what happens to my share if you transfer your interest or fail. The rules require the firm to have thought about it. Ask what the answer is for the specific product you are being offered.
Where this comparison does not apply
Everything above describes co-ownership arrangements: Gatehouse Bank, StrideUp and Offa use diminishing musharaka or acquisition and rent, where the provider genuinely holds an interest in your home.
3 propositions in our register work differently. Under a commodity murabaha the provider buys metal commodities, sells them to you at a marked-up deferred price and the commodities are sold on to raise the cash you use to buy the property. You own the home from the outset and the provider takes security over it, which is structurally much closer to a conventional mortgage than to a home purchase plan. Nothing on this page describes those arrangements, and we set out the difference on the home purchase plan page.
Common questions
- What is the main difference between an Islamic mortgage and a conventional mortgage?
- Ownership. With a conventional mortgage you own the property from completion and the lender holds a charge over it. With a home purchase plan the provider buys the property or a share of it and you acquire that interest over the term, paying rent on the part you do not yet own. Every other structural difference follows from that one.
- Is an Islamic mortgage safer or riskier than a conventional mortgage?
- The conduct protections are largely aligned. The FCA’s arrears and repossessions rules apply to a home purchase provider as they do to a mortgage lender, and additional rules require a firm to protect the customer’s right to occupy and the interest being acquired, including if the provider fails or transfers its interest. Suitability for you personally is a question for an authorised adviser.
- Do you own your home with an Islamic mortgage?
- You acquire ownership over the term rather than holding it from the start. On the co-ownership arrangements used by the mainstream UK providers, you and the provider hold the property between you and your share grows with each acquisition payment until it is entirely yours.
- Is an Islamic mortgage more expensive than a conventional one?
- On published rates at the tiers we can benchmark, yes. That question is measured separately against a dated Bank of England quoted-rate series rather than asserted here.
Where to go next
See the measured cost difference Check which criteria fit your situation Ask an adviser your question
The legal test and the structures · The process, step by step · Compare providers