Buying property is an essential step for stability and security, in the modern economies Mortgage is predominant method to purchase property. However the process usually conducted by mortgage provider (Bank or Building Society). mortgage loan is a long term loan secured by the property. The lender (mortgage provider) purchase the property on behalf of customer and add certain interest on top of the original value, this interest can be either fixed or variable.
Current mortgage system caused significant inflation in the property market because of two main factors:
1) Interest: interest charged on property with compound interest and misleading insurance on property contributed into raise of property value, which eventually led to inflated bubble and leaving mortgage buyers under accumulated stress for paying back installments.
2) Over lending: the 100% mortgage allowed any applicant to purchase a property via mortgage provider increased demand for properties, especially that property elasticity to demand is quite high this led to price increase over the real prices.
Despite the growing demand for an alternative, fair and safe model to conventional mortgage system, Islamic finance can play an important role in eliminate risk of current property finance system, to offer mortgage comply with Islamic standards, mortgage provider must comply with the following criteria:
1) Interest charged on top of original value must be fix.
2) Payment Default: No late fees or any interest charged in case of delay or overdue payment occurred.
3) Insurance : All insurance offered on the property must comply with Islamic Insurance (TAKAFUL).
4) Misleading: Misleading is totally prohibited in Islam, contract terms and conditions must be very clear and understandable by mortgagee (not by mortgagee’s lawyer), most of offered financial services implicate several ways of misleading this started from the marketing, advertisement, to financial and insurance services.
5) Termination: In case of termination mortgage provider must repay all money received by mortgagee.