Ethical mortgages explained: a how to guide
An ethical mortgage is one that lies on principles aligning with integrity, one that meets peoples moral values.
Providers of ethical mortgages
1. Building societies
Building societies outperform traditional banks in ethical mortgages this is due to their lack of participation in financing damaging industries like mining, nuclear weapons and fossil fuels. On the contrary most high street banks are repeat participants in investments such as fossil fuels for example, ultra-deep sea drilling. And to further worsen the situation some high street banks might also be funding destructive weapons used by the military.
Ethical behaviour doesn’t always have to come at a cost as mortgages provided by building societies actually tend to be cheaper than from a high street bank, and this could be due to building societies being mutual organisations, this means that consumers are the members of the building societies, therefore they have a say in decision making and as a result people have more control in how the society is run. This can be done through voting on key issues and members voicing their opinion at annual meetings. Building societies do not have shareholders and so don’t pay dividends and as a result they are able to spend all the profits lowering interests on loans and paying more competitive rates on savings, benefiting its members. According to BSA paying dividends to shareholders increases a banks running costs by around 35%. Furthermore, building societies also offer better customer service, a YouGov poll found that 79% of customers would recommend their building society to a friend, while only 60% would recommend their bank.
–Nationwide building society is the second largest mortgage lender in the UK
2. Islamic home finance
Sharia law complaint home purchase plans are “mortgages” where you do not pay interest. This is because sharia law forbids the payment or receipt of interest, this is because one party would gain at the expense of another. So how does this work you might ask, what is incentivising banks to provide these if no interest is paid? Well, to begin with there are three types of Islamic home finance:
-1. Ijara: this is the leasing element of a home purchase plan, you pay part capital and part rent, where the rent makes up the amount of interest you would’ve been charged on a traditional mortgage.
-2. Murabaha: is where the lender buys the property and sells it to you at a higher price, the higher price representing the profit element for the provider.
-3. Diminishing Musharaka: this is where you own “shares” in the property, so again your mortgage repayment consists of capital and rent, so as time goes by you “buy” more shares until you own the property outright.
So how is this ethical? Well, mainly because you don’t pay interest so it isn’t conflicting with the Islamic principle of equality. Islamic home purchase plans however tend to be costlier, so check whether you’ll be able to meet your monthly repayments, one of the reasons for being more expensive is the repayment term eg. Murabaha only offers a mortgage term of 15 years, so you get less time to pay back the borrowed amount.
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