Islamic Mortgage in UAE: All You Need to Know

What Is an Islamic Mortgage?

In Islam, money comes with a unique set of rules. You can gain monetary benefits only when there is fair trade happening. Under Sharia law, making more money from money is prohibited. Therefore, the Islamic mortgage system, which is also referred to as a halal mortgage, is technically not a traditional mortgage. Rather, it is a home financing structure based on a lease or sale agreement between a lender and a customer. In such situations, there is no interest payable.

In this way, Muslim buyers can engage in property transactions without obstructing their faith.

How Islamic Mortgages Work

Navigating through a halal mortgage is a relatively straightforward process.

In this process, a designated bank will buy a property for the buyer and either take rent from the buyer until the entire property value has been paid or sell it back to the buyer for a higher price. In this plan, despite paying in instalments, the buyer does not pay any interest.

A halal mortgage, like a regular one, will require the signing of a contract between both parties once they have agreed upon a property price. Typically, the buyer gives the bank a deposit amount, which can range from 5% to 35% of the total property value.

Until the buyer has paid off the entire property amount, the property legally belongs to the bank (or the lender). While rental rates in an Islamic mortgage are subject to fluctuation, these products generally have a fixed payment period in the contract, much like a standard mortgage.

Islamic Mortgage Options in the UAE

There are several pathways within the Islamic mortgage segment in the UAE that you can select from, depending on your circumstances and requirements. They are:

Partnership Agreement (Musharaka)

This is a joint ownership model where both the bank and the buyer co-own the property. While the bank pays for the bulk of the amount, the buyer contributes a smaller initial payment.

The buyer retains full property ownership by gradually making regular payments to the bank. This form of halal mortgage reflects the Sharia principle of shared risk and reward.

Lease Agreement (Ijara)

In this pathway, the bank purchases the property and leases it to the buyer for a fixed period. Within that period, the buyer makes regular rental payments until they have paid off the entire amount. Then, the property will be transferred to them.

Construction Financing (Istisna)

This method is used for off-plan properties, wherein the bank funds the property’s construction based on predetermined guidelines and specifications. The buyer’s job is to make regular payments in the form of instalments or once the project is ready. This is a great option for buyers wanting to customize their properties.

Cost-Plus Financing (Murabaha)

This is a very simple form of halal mortgage, wherein the bank purchases a property and sells it directly to the buyer for a higher amount. The total amount can be paid off in instalments by the buyer.

Benefits of Choosing an Islamic Mortgage

Here are some benefits for those who go with an Islamic mortgage:

• This pathway facilitates transactions that are both transparent and ethical, complying with Sharia law, making it easier for Muslims to engage in property transactions.

• For Muslims who follow Sharia law, this is an excellent way to pursue home ownership, as they do not have to invest a substantial amount of money immediately and can work their way towards home ownership.

• All pathways within this mortgage system are interest-free, which reduces the financial burden on buyers considerably.

• One of the perks of Islamic mortgages is the flexible financing system, which gives buyers several options to fund their property. This makes property ownership even more accessible for people of different backgrounds and financial capabilities.

Key Differences Between Islamic and Conventional Mortgages

Let us proceed to understand an Islamic mortgage vs a conventional mortgage, as there are several key differences between both pathways.

• Islamic mortgages do not involve activities such as derivatives trading or speculation, which are generally allowed in conventional finance.

• Conventional mortgages do not have strict rules around ethics, instead focusing on profitability. Islamic mortgages place emphasis on ethical transactions, ensuring that neither party is impacted detrimentally, and profit-chasing is not the main focus.

• Risk-sharing is a major tenet of Islamic mortgages, wherein both the bank and the buyer share the risk of any profits or losses. In conventional mortgages, the risk mainly falls upon the buyer, not the bank.

• Interest rates are applicable in conventional mortgages but are strictly prohibited in a halal mortgage.

Who Can Apply for an Islamic Mortgage

Contrary to what many people assume, an Islamic mortgage is not just a provision for Muslims. In fact, anyone can apply for this mortgage, provided they meet the eligibility criteria.

The criteria include:

• Non-residents and expats must have a stable income source with a good credit score.

• Businesses wanting to carry out a halal mortgage must not be involved in any activities that are prohibited under Sharia law, such as gambling, alcohol, or speculative trading. The company should maintain a transparent operational model, which aligns with the risk-sharing principles of this mortgage pathway and asset-backed financing.

Applying for an Islamic mortgage is relatively simple. The buyer can have an initial consultation with the bank, wherein their case and finances are assessed to determine the best pathway. Once that is decided, the buyer must submit the required documents to the bank, and their application will be reviewed. Upon approval, a contract will be drawn up stipulating the kind of mortgage and its conditions, which both parties will sign. Depending on the contract, funds will either be disbursed or the buyer will follow the predetermined payment period.

Top Islamic Mortgage Providers in Dubai

Here is a list of banks that provide Islamic mortgages in Dubai:

• Abu Dhabi Islamic Bank

• RAKBANK

• Dubai Islamic Bank

• National Bank of Fujairah

• Emirates Islamic Bank

Conclusion

Whether you're a first-time buyer or a seasoned investor, understanding what an Islamic mortgage is, and the key differences between Islamic mortgage and conventional mortgage, can help you make confident, Sharia-compliant financial decisions. With interest-free structures and ethical financing options, Islamic mortgages in Dubai offer a powerful alternative for buyers seeking values-based homeownership.

At Engel & Völkers, our team is here to support you every step of the way, from helping you find your dream property to connecting you with expert mortgage brokers. Whether you’re exploring Islamic mortgage vs conventional mortgage options or ready to purchase a home, we’re here to guide you.