IHSAN MEER is 40 years old — and has just taken out his first mortgage. He approached it, not unlike most buyers, with some trepidation. He found a house in Dewsbury, West Yorkshire, that he wanted, and agreed a mortgage with HSBC after carefully checking the terms and conditions of the deal.

It was no conventional mortgage, however, because Ihsan is a Muslim and Sharia forbids the payment or receipt of interest. Instead he took advantage of the burgeoning market in Islamic finance in the UK.

Based on the principle of ijarah (leasing), the Islamic mortgage works like this: the bank buys the property, rents it to you and then sells it to you after 25 years, or however long the period of the contract. Before last year’s Budget, stamp duty was being paid both at the outset and after the agreed term, leading to significantly higher costs. That ended on December 1 last year, and stamp duty is now paid only at the start. Datamonitor predicts that the change could create a market worth up to £5 billion. HSBC estimates that it might be more like £10 billion.

Three providers — HSBC, Ahli United Bank and the United National Bank — are already offering such products, and other companies are set to follow. The Arab Banking Corporation and the Islamic Bank of Britain each plan to offer one later this year.

Mohammed Karolia, 27, from Batley in West Yorkshire, also applied for an Islamic-style mortgage with HSBC. “HSBC came to give talks in community centres near me,” he says, “and lots of people are interested. They just need to see a few people do it, then all of them will have them.” Mohammed paid close attention to the details of the loans. He spent seven years studying Islamic theology and was impressed to learn that one of the members of HSBC’s Sharia committee was Mufti Muhammad Taqi Usmani, a leading scholar in Islamic law.

But how do such mortgages compare? Vicky Hodgson, head of consumer credit at Money- extra mortgages, says it is difficult to make a direct comparison with a standard UK mortgage, but you can compare the monthly payments with what you would pay as mortgage repayments. The monthly cost of a £100,000 advance over 25 years with HSBC would be £580.53. That equates to a repayment mortgage with an interest rate of just less than 5 per cent.

There are other issues. There is no guarantee, for instance, on how the rent will change. It is renegotiated every six months, on January 1 and July 1. HSBC says that increases in the amount paid will be “broadly in line with a conventional mortgage”. On January 1 of this year, HSBC opted to freeze the rate.

Equally, the legal costs may be greater. HSBC says that “there are three sets of solicitors or legal advisers involved, one acting for the bank, one for the customer and one for the seller. So the legal cost for this mode of financing is higher than for a conventional mortgage.”

The HSBC loan may not compare to the cheapest conventional mortgages, but the market is still very new. “It has generated a huge amount of interest but HSBC hasn’t written a huge amount of business so far,” says the financial adviser Ray Boulger, of Charcol.

Vicky Hodgson thinks a better deal might be on the way: “An increase in the number of competing providers can only bring benefits to the UK’s Muslim population, both in terms of product choice and cost.”

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