Sharia-Compliant Finance for New Builds: What Developers and Buyers Should Know

Navigating Sharia-Compliant Finance for New-Build Homes

Islamic finance has moved into the UK mainstream, offering buyers and developers new ways to fund property purchases that align with Sharia law. As demand for new-build homes grows, so does interest in Sharia-compliant options. But how do these products work, and what should both buyers and developers consider before proceeding?

Conventional mortgages rely on interest payments, which Islamic law strictly prohibits. Instead, Sharia-compliant finance offers alternative structures that avoid interest, such as shared ownership schemes or lease-to-own models. These models are built around partnership, risk-sharing, and tangible assets, providing a route to homeownership that respects religious principles.

For developers, understanding these products opens doors to a wider market of buyers. For buyers, it’s about accessing finance that meets both practical and faith-based needs. Both groups should understand the terminology, costs, eligibility criteria, and step-by-step process involved.

While Sharia-compliant finance is not new in the UK, applying it to new-build properties presents unique considerations—such as staged payments, developer reputation, and lender requirements. This guide aims to clarify the essentials, helping both buyers and developers make informed decisions.

Who Should Consider Sharia-Compliant Finance?

Sharia-compliant finance is particularly relevant for:

• Muslim buyers seeking to purchase a new-build home without compromising on faith-based principles.

• Developers looking to attract a broader clientele by accommodating Islamic finance.

• Non-Muslim buyers interested in ethical or alternative finance models.

• First-time buyers, buy-to-let investors, and self-builders who prefer risk-sharing over traditional interest-based loans.

It is particularly suitable for:

• Those unable or unwilling to take out standard mortgages due to religious reasons.

• Buyers interested in ethical investing and transparent cost structures.

• Developers aiming to build trust with diverse communities or working on projects in areas with significant Muslim populations.

However, it may not suit those seeking the lowest possible upfront costs or who require highly flexible repayment terms. Understanding your priorities and consulting with a specialist broker is always advisable.

Key Terms and Concepts in Islamic Finance

Some basic principles underpin all Sharia-compliant finance products:

• Riba: The prohibition of interest payments.

• Ijara: A lease-to-own arrangement where the bank buys the property and leases it to the buyer, transferring ownership at the end.

• Murabaha: The bank buys the property and sells it to the buyer at a marked-up price, paid in instalments.

• Musharakah: A partnership model (often Diminishing Musharakah) where the buyer and bank jointly own the property, with the buyer gradually buying out the bank’s share.

• Halal: Permissible under Islamic law.

All Sharia-compliant providers work with a board of Islamic scholars to ensure products remain fully compliant.

Sharia-Compliant Finance Options for New Builds

There are three main structures:

1. Diminishing Musharakah (Partnership Model)

   • Buyer and lender jointly purchase the property.

   • Buyer gradually buys the lender’s share over time.

2. Ijara (Lease-to-Own Model)

   • Lender buys the property and leases it to the buyer.

   • Buyer pays rent plus a contribution toward eventual ownership.

3. Murabaha (Cost-Plus Sale)

   • Lender buys the property and immediately sells it to the buyer at a set mark-up, repaid in instalments.

For new builds, lenders assess the developer’s credibility, construction timelines, and payment stages. Some may offer staged payments to developers as construction progresses, mirroring the release of funds in standard mortgages.

Costs, Returns, and Risks

• Upfront and Ongoing Costs: Sharia-compliant products often charge administrative fees and may have higher upfront costs than conventional mortgages. Monthly payments can be comparable, but there are fewer hidden charges.

• Returns for Developers: Developers may benefit from access to a wider pool of buyers, but must meet lenders’ requirements for build quality and completion guarantees.

• Risks: If property values fall, both buyer and lender share the risk in partnership models. Early repayment rules may differ, and some products have less flexible exit options.

Note: There may be fewer providers in this market, potentially limiting choice.

Eligibility and Conditions

Eligibility typically depends on:

• Property Type: Must be UK-based and suitable for residential use.

• Deposit: Often 20% or more for new builds.

• Creditworthiness: Standard checks apply, though some providers are more flexible.

• Developer Approval: Lender must approve the developer and stage payment schedule.

• Sharia Compliance: The structure and use of the property must meet Islamic finance rules.

How Sharia-Compliant Finance Works: Step-by-Step

1. Research eligible providers and products

2. Obtain developer approval from chosen lender

3. Submit application and supporting documents

4. Arrange property valuation and legal checks

5. Agree on payment schedule for new build

6. Lender releases funds in stages as construction progresses

7. Buyer makes monthly payments (rent or buy-out)

8. Ownership transfers fully after final payment

Pros, Cons, and Considerations

Pros:

• Faith-compliant and ethical

• Transparent cost structures

• Risk-sharing between buyer and lender

Cons:

• Higher deposit requirements

• Fewer providers and products

• Early repayment can be less flexible

For developers, the main advantage is market expansion, while the primary challenge lies in meeting lender requirements for staged payments and build guarantees.

Before You Decide: Things to Watch Out For

• Provider Credentials: Work only with FCA-authorised lenders and brokers.

• Product Structure: Ensure you fully understand the repayment model and any fees.

• Build Timelines: Delays can complicate staged payments, so check the developer’s track record.

• Legal Advice: Use a solicitor experienced in Islamic finance.

Scrutinise the contract for non-compliance clauses that could affect ownership or repayments.

Other Options and Alternatives

• Standard Mortgages: Widely available, but not Sharia-compliant.

• Shared Ownership Schemes: May work for buyers on lower incomes, though not always faith-compliant.

• Help to Buy: Some Islamic lenders participate, but schemes vary.

• Private Arrangements: Some buyers arrange family loans or cooperative purchases, but these can be complex and less regulated.

Always compare all available options with a trusted adviser.

Frequently Asked Questions

1. Can I use Islamic finance for any new-build property? Only if the lender approves the property and developer. Not all new builds or developers are eligible.

2. Are Sharia-compliant products more expensive than standard mortgages? They can be, particularly in terms of upfront costs and deposit. Monthly payments are often similar.

3. Can non-Muslims use Sharia-compliant finance? Yes. These products are open to all, and some non-Muslims choose them for ethical reasons.

4. What happens if my developer delays completion? The lender may pause or adjust staged payments. Communication is key.

5. Is early repayment allowed? It depends on the product; some allow it, others have restrictions or penalties.

6. Do I need a larger deposit for a new build? Typically yes, often 20 percent or more.

7. Is this type of finance regulated? Yes. Providers must be authorised by the Financial Conduct Authority (FCA).

Next Steps

If you’re considering Sharia-compliant finance for a new build, consult a specialist broker who can guide you through available products and eligibility. Request quotes, compare key features, and always use an FCA-authorised adviser. Developers should engage early with lenders to streamline buyer approvals.

Disclaimer

This article provides general information only and does not constitute financial advice. For personalised guidance, always consult a qualified financial adviser or mortgage broker authorised and regulated by the FCA.