One of the largest decisions many of us may face is whether to buy or rent a property. In some circumstances renting can be more convenient than purchasing property, particularly if you want something temporary or if you don’t wish to be tied down to a location. However, in the long term it might not be the best move to make financially, since renting effectively means you are paying someone else’s mortgage. They will most likely price the rent at more than their monthly mortgage payments in order to make a profit.
Renting can also be seen as “dead money” as you have nothing to show for it at the end. I rented on and off for 7 years spending tens of thousands of pounds with no property in my name at the end of it. On the other hand, purchasing property with a mortgage means that although you are still making monthly payments, these may be even lower than the average rent prices and you will own a property once the mortgage is paid off. Furthermore, it can also be seen as an investment since the value of the property is likely to increase considerably with time.
One of the main hurdles faced when purchasing property is raising enough money for a deposit. Despite some offers handed to first time buyers  allowing them to only put down a 5% deposit ; given property prices in some areas such as London, even raising 5% of the house value can prove to be difficult. There is no doubt that saving enough money for a deposit requires disciplined saving as well as potentially asking for help from family.
In Islam caution is required when it comes to interest. However, Ayatullah Sistani permits taking out a mortgage provided the intention is not to take a loan and pay interest despite you knowing you will have to pay this, (see last question on this reference ). Rather, your intention should be mainly to provide a home for yourself and your family and making a long-term financially sound decision.
Initially when planning to take out a mortgage the main things to consider are:
When you take out a mortgage, although the interest rate may seem low, in reality you will pay back a lot more than you may initially think. For example, say you borrow £200,000 over a period of 25 years and your interest rate is 5%. You may do a normal percentage calculation (£200,000 * 5% = £10,000) and assume this is the amount of interest you’ll pay back. However, if you input these details into a repayment calculator 5 you will see the interest you’ll pay back is over £150,000! Consequently, in total you will pay back £350,000 altogether: £200,000 loan + £150,000 interest i.e. 75% interest.
But why is the interest paid much higher than you initially thought? Well, it’s because banks using a different formula for working out interest repayments, which can include multiplying by the power of the number of years of the mortgage. Before signing up to a mortgage deal make sure you get a Key Facts Illustration  (KFI) document which should state for example “For every £1 you borrow you will pay back £1.75”. It will give you a much clearer idea of what you should expect to pay.
If you choose an interest only mortgage it means you only ever pay the interest each month and are expected to pay back the full amount borrowed at the end of the term. However, a repayment mortgage is the most common type. It is less risky and is where your monthly payment pays off both the interest and capital. 
Even with a repayment mortgage, in the early years most of each month’s payment is just paying the interest for that month, as the interest is so high. Over time a greater percentage of the monthly payment goes towards paying off the capital.
In fact using an overpayments calculator,  if you have a £200,000 loan at 5% interest over 25 years your monthly payments are around £1,168. However, if you increase your payments to £1,368 you save £41,749 of interest and pay off your mortgage over 6 years earlier! This £41,749 would be a complete saving, as the capital would have had to be paid anyway. A significant number of homeowners have overpaid in recent years .
However, before taking out a mortgage check if your bank allows you to make overpayments, as some do but have limits. For example, First Direct allows you to pay 10% of your outstanding loan balance back in overpayments each year, which is easy to stay within during the early years but not towards the end of the term.
Before taking out a mortgage deal always ask if they calculate the interest daily, monthly or yearly. Ideally you want your bank to calculate the interest on your mortgage daily or monthly. This is so that when you overpay in your monthly payment or even just pay the normal amount the interest for the next month is a bit lower as it takes this reduction of loan outstanding into account. If your bank only calculates interest yearly then you only see the benefit of the overpayments after a year.
Now let’s say that after 2 years you only pay off £10,000 of capital because most of your monthly payments are covering interest. If your house value increases to £300,000 your LTV will significantly decrease. That’s because your LTV is now an outstanding loan of £215,000 divided by the value of the property of £300,000 which would give you an LTV of 71.7% compared to the previous LTV of 90%. It’s significantly lower mainly due to the increase in value. The lower your LTV the lower your interest rate, deals are normally quoted at 95% LTV, 90% LTV, 85% LTV (i.e. in bands of 5%) so you could get a 75% LTV deal or overpay and/or wait for the value to increase to bring your LTV down to 70% and get a better deal.
Note– If you are on a fixed term deal such as 2 year fixed or tracker you are likely to have to pay a penalty fee for coming out of the deal early. Your best option here would be to work out if it’s worth it or not. If you are near the end of the deal it is always worth shopping around to see if you can benefit from your lower LTV.
Overall although mortgages can be very expensive, you can still save a lot of money by following the tips above. If you are sensible in terms of the amount you borrow, shop around for the best deals, as well as try to regularly overpay by fixing your standing order higher than the amount the bank asks for, you can save a lot of money and pay years earlier. Also by the time the loan is paid off, you will hopefully own a property that has risen significantly in value. In an area where house prices are rising quickly you may find your yearly mortgage payments are much lower than the rise in your home value so you could actually be making money on the property from your first year. Sound financial decisions are important in Islam. We work hard to earn halal money so should be careful to spend it in the right way and save where possible.
Written by Saqib Hussain