Islamic home finance in the UAE: ijara and other structures

Islamic home finance in the UAE replaces an interest-bearing loan with ownership. In an ijara, the bank buys the home, leases it to you and transfers it to you at the end under a separate promise; in diminishing musharaka, you buy out the bank’s share in stages. The Central Bank’s mortgage limits, including the loan-to-value caps, the 25-year term and the 50% debt burden ratio, apply in full.

Key takeaways

• In an ijara, the bank owns the home and leases it to you; ownership passes to you at the end through a separate sale or gift.
• In diminishing musharaka, you and the bank co-own the home, and you buy the bank's share in stages while paying rent on it.
• The rent can be fixed or variable, and the Central Bank's limits on loan-to-value, term and debt burden apply in full.
• Islamic lenders may charge early settlement fees only for their actual costs, within the same cap as conventional home loans.
• Compare Islamic and conventional offers by APR and total cost, not by the label.

How Islamic home finance differs from a conventional mortgage

A conventional mortgage lends you money at interest. Islamic home finance uses ownership instead: the bank owns the home, or a share of it, and earns rent while you pay it off. The Central Bank’s mortgage regulations still apply, on top of the rules each bank’s Shari’ah committee sets.

Islamic home finance

Same rules apply

Mortgage loan providers granting home finance under Shari'ah principles should also comply with the requirements of the Central Bank's mortgage regulations, in addition to the specific requirements their Shari'ah advisory committees set for each mode of financing.

The lender must disclose the contract a product uses and its Shari’ah committee’s approval, and the Key Facts Statement should state that basis (Consumer Protection Standards, Article 2, clause 2.1.1.42). For the wider comparison see Islamic vs conventional finance and murabaha explained.

Ijara: lease to own

An ijara is a lease: the bank buys the home, you rent it for the term, and a separate promise transfers it to you at the end.

Ijarah, Central Bank definition

A lease for agreed rent

The Central Bank defines ijarah as a lease agreement under which the owner (lessor) of a leasable item leases, or sells, its usufruct (the right to use it) to another person (lessee) for a specific period against a specific consideration.

Step by step

Dubai Islamic Bank’s Shari’ah certificate for its ijarah property finance (ijarah muntahiya bittamleek), approved on 22 August 2021, is one example; other banks differ in detail.

1. You sign an application and a promise to lease the home once the bank owns it.
2. The bank buys the home, or a share of it, at the market price.
3. The bank owns it for the term. It may stay registered in your name, but it is mortgaged to the bank at the land department.
4. You sign a lease of at least one year and pay rent under it.
5. You undertake to buy the home at an exercise price if the bank calls on that undertaking after a default; the bank undertakes to sell it to you for a nominal price at the end.
6. Once you have met your obligations, a sale contract transfers the home to you.

The Central Bank’s Regulation No. 1/2026, which applies from 14 September 2027, describes the same pattern: the bank may promise, in a document separate from the lease, to transfer the home to you by sale or gift, and ownership passes only through a separate contract. The regulation is in Arabic only; our summaries are translations.

Islamic transactions regulation

Applies from 14 September 2027

The Central Bank has issued Regulation No. 1/2026 under the Commercial Transactions Law, setting rules for the commercial transactions of Islamic financial institutions and takaful companies in the UAE, including financing contracts such as murabaha, ijarah and musharaka; the Rulebook gives 14 September 2027 as the date it applies from.

Fixed and variable rent

The rent can be fixed for the term or reset period by period against a benchmark. Emirates Islamic’s pre-approval terms, for example, say its home finance is based on EIBOR and the profit rate may vary with it.

From 14 September 2027, each period’s variable rent must be set before the period starts, from a benchmark neither side controls, and the contract must state a maximum and a minimum for that benchmark.

Variable rent, from 14 September 2027

Variable rent with cap and floor

An ijarah may carry a fixed or a variable rent; a variable rent is allowed if the first rental period's rent is a set amount in the contract and each later period's rent is worked out before that period starts from an index or benchmark neither party controls, which must have a maximum and a minimum stated in the contract, and a period's rent cannot change once that period has begun.

Today, the lender must already show the base rate and the margin separately and illustrate what a rate rise would do to your payments (Article 2, clauses 2.1.1.36 and 2.1.3.6). See how EIBOR moves your rate.

Who pays maintenance and insurance

From 14 September 2027, the bank as owner bears basic maintenance, insurance against damage and ownership taxes, and cannot pass them to you or add them to the rent automatically. Until then, check what your contract and the bank’s Shari’ah certificate say. Dubai Islamic Bank’s certificate keeps the ownership risks with the bank but appoints you as its service agent for duties such as arranging takaful (Islamic insurance), and Emirates Islamic makes life and property takaful mandatory. Where cover is a condition, you can choose the provider from at least three the lender has approved.

Choice of takaful provider

At least 3 insurers

Where insurance or takaful is a mandatory part of a credit or financing product, the lender must explain its purpose, disclose the cost of its own policy in writing and let the consumer choose a provider from at least 3 insurance or takaful providers the lender has approved.

Diminishing musharaka: buying out the bank’s share

In diminishing musharaka, you and the bank buy the home together. You pay rent on the bank’s share and buy that share in stages, so the rent falls as your share grows, until you own the whole home.

The shares are illustrations. From 14 September 2027, Regulation No. 1/2026 lets a partner in a banking musharaka promise to buy the other’s share in stages.

Staged buyout, from 14 September 2027

Share bought out in stages

Under the Central Bank's Islamic transactions regulation, in a banking musharaka the Islamic bank and the customer share in a partnership's capital and divide profit by agreed shares; one partner may promise to buy parts of the other's share in stages, so that the other's share keeps falling until the promising partner owns all of it, and losses are borne in proportion to each partner's capital share.

Read that rule with care. It describes a business partnership, mentions neither home finance nor the term diminishing musharaka, and says a customer’s promise to buy a banking musharaka’s assets must be at market price or a price agreed at the time, not a fixed price or formula. The Central Bank’s glossary has no musharaka entry, and the Dubai Islamic Bank example we found, its Real Estate Diminishing Musharika, is a corporate product for rental property. If a bank offers you musharaka home finance, ask how the price of each share is set.

Off-plan homes: istisna and forward ijara

For a home not yet built, a bank can pair an istisna, a contract to have it built, with a forward ijara, a lease starting on a future date. Dubai Islamic Bank’s certificate for this structure (22 August 2021) works like this:

1. Based on your promise to lease, the bank arranges construction under an istisna contract.
2. Under a forward lease you pay advance rentals, which the bank holds in trust (amanah) until handover.
3. After handover the advance rentals are set off against an equal additional rental, and the lease becomes an ijara ending in a sale to you for a nominal price.

From 14 September 2027, a lease of a home described in the contract, rather than one that already exists, can be signed before the bank owns it, but starts only after the bank owns it and you are given use of it. The off-plan cap is the conventional one.

Off-plan property, all buyers

50%

The maximum loan-to-value for a mortgage on a property bought off-plan is 50%, regardless of purpose, value or buyer type.

Escrow, developer payments and registration are in financing off-plan property.

The same Central Bank limits

Islamic home finance has the same limits as a conventional mortgage, and as federal Central Bank rules they are the same in Abu Dhabi and Dubai.

Expat, first home under AED 5 million

80%

Expatriates buying a first home to live in worth less than AED 5 million can borrow up to 80% of the property's value.

UAE national, first home up to AED 5 million

85%

UAE nationals buying a first home to live in worth up to AED 5 million can borrow up to 85% of the property's value.

Maximum term

25 years

The maximum tenor of a mortgage loan is 25 years.

Maximum debt burden ratio

50%

Monthly deductions for all loans and facilities from banks and finance companies together, including car loans, home loans, overdrafts and credit cards, must not exceed 50% of the borrower's gross salary and any regular income from a defined and specific source, at any time.

Stress test

+2 to 4 points

When working out the debt burden ratio, mortgage lenders must stress-test the loan at 2 to 4 percentage points above its current interest rate; with an introductory rate, the test uses the rate that applies after it ends.

For the AED 960,000 in the worked example, testing at 5% plus 2 points gives about AED 6,785 a month, so under that test a buyer with no other debts needs at least about AED 13,570 of gross monthly income. The full table is in home finance limits, and a mortgage pre-approval checks these limits before you choose a home.

What it costs: rent, profit and APR

An Islamic mortgage is not more expensive by definition: at the same rate, amount and term, the payment can match a conventional loan exactly, as the worked example shows. The price comes from the profit rate the bank sets, its fees and any takaful it requires, and the Annual Percentage Rate (APR) combines profit and fees in one yearly figure.

Annual Percentage Rate

APR disclosed

Lenders must disclose the Annual Percentage Rate (APR), which includes the total interest or profit payable and other fees compounded over a year.

Check the costs around the finance too, such as valuation, which Emirates Islamic’s terms put on the customer. Ask which Dubai Land Department fees apply to the bank’s structure; the standard ones are in DLD and mortgage registration fees and the home purchase cost calculator.

Worked example: an ijara with variable rent

At an illustrative 5%, AED 960,000 of ijara finance over 25 years costs about AED 5,612 a month, and a reset to 6% after two years makes it about AED 6,149.

Worked example

Home worth AED 1,200,000, expat first home, ijara over 25 years

The rates and the 4% to 8% band are illustrations. The rent is assumed to be priced like a reducing-balance repayment; your contract sets how yours is worked out.

1. Bank’s amount at the 80% cap: AED 1,200,000 × 80% = AED 960,000. Your own funds: AED 240,000.
2. Monthly payment at 5% over 300 months, by the reducing-balance formula: about AED 5,612.06, the same as a conventional loan of AED 960,000 at 5%.
3. First month: AED 960,000 × 5% ÷ 12 = AED 4,000 at the rate; the other AED 1,612.06 reduces the bank’s amount.
4. After 24 payments, about AED 919,398.67 of the bank’s amount remains.
5. The benchmark rises and the next period’s rate is set at 6%. Over the remaining 276 months the payment becomes about AED 6,149.37, or AED 537.31 more.
6. From 14 September 2027 the contract must also state a maximum and a minimum for the benchmark. If, with the bank’s margin added, they keep the rate between 4% and 8%, the payment from that point can move between about AED 5,100.37 and AED 7,294.99.

Rate from month 25	Monthly payment	Change from AED 5,612.06
4% (minimum)	AED 5,100.37	AED 511.69 less
5% (no change)	AED 5,612.06	None
6%	AED 6,149.37	AED 537.31 more
8% (maximum)	AED 7,294.99	AED 1,682.93 more

On these figures, a one-point rise after two years adds about AED 537 a month, and the 4% to 8% band keeps the payment between about AED 5,100 and AED 7,295.

Early settlement, buyouts and late payments

You can settle Islamic home finance early or move it to another bank. An Islamic lender may charge only the actual costs that early settlement causes it, within the home finance fee cap.

Islamic early settlement fee

Actual costs only

Islamic financial institutions may charge early settlement fees only for the actual costs caused by the early settlement, in line with the Higher Shari'ah Authority resolution No. 76/3/2019, and must follow the Central Bank's early settlement rules.

Home finance settlement fee cap

1% or AED 10,000

Early settlement and partial settlement fees on a home loan are capped at 1% of the outstanding balance or AED 10,000, whichever is less.

In the worked example, about AED 919,398.67 is outstanding after two years. 1% of that is AED 9,193.99, below AED 10,000, so the cap is AED 9,193.99 before VAT, and an Islamic lender may charge only its actual costs within it. Ask for the figure in writing. Where the home is mortgaged to the bank in Dubai, as in Dubai Islamic Bank’s ijarah, the Land Department says the mortgage can move to another financier once your bank issues a no-objection certificate (Dubai Land Department FAQ).

Late payment works differently. Today, an Islamic lender must tell you when a late payment fee or commitment to give to charity will be imposed, how much it is and how it is calculated, and base it on administrative cost, with no return to the lender (Article 2, clause 2.1.3.12). From 14 September 2027, Regulation No. 1/2026 adds that an Islamic debt can never be rescheduled in return for an increase; charity commitments the bank does not benefit from, and its actual collection costs, do not count as one. In Dubai Islamic Bank’s ijarah, a default also lets the bank require you to buy the home at the exercise price, so check how your contract sets it.

Is an Islamic mortgage halal?

We do not give religious rulings, but we can explain who approves a product. Each one is approved by the bank’s Internal Shari’ah Supervision Committee, within standards set by the Higher Shari’ah Authority at the Central Bank.

Higher Shari'ah Authority

Binding and final

The Higher Shari'ah Authority, established at the Central Bank by a Cabinet Resolution and Federal Decree-Law No. (6) of 2025, is the supreme Shari'ah reference for the UAE financial sector, and the Shari'ah standards and controls it issues are binding and final for all Islamic financial institutions.

The bank must give you adequate information on a product, including its Shari’ah certificate, and access to its Shari’ah function if you doubt the product (Consumer Protection Standards, Article 11, clause 11.1.1.9). Dubai Islamic Bank publishes certificates like the two used in this guide. Governance is covered in Islamic vs conventional finance, and more topics in our Islamic finance guides. For a ruling on your own situation, ask a qualified scholar.