Have you ever wondered how Muslims could buy homes if they cannot afford to pay the price by using personal financing? Most Muslims in the West and other countries need to buy homes by borrowing. Is there any Halal way to purchase homes without paying an interest which is haram or forbidden in Islam? In other words, what is an Islamic mortgage? What is Halal or Islamic home financing?
It is an important topic for Muslims living in the West and in Muslim-majority countries as well.
They have been trying to find Islamic ways of owning homes without paying interest. How can they do that?
According to Islamic home financing services being offered in various parts of the world, people do not need to pay interest while borrowing for owning homes.
How does Islamic Home Financing Work?
Before we delve into how Islamic home financing works we need to have a better understanding of the related concepts.
What is Halal Mortgage?
A halal or Islamic mortgage is a mortgage that complies with the principles stipulated by Shariah for mortgages, money, and borrowing. Islamic finance professionals use the concept of diminishing musharkah to define how they can lend money to interested people to buy homes without actually paying interest.
Islamic Home Financing vs. Conventional Mortgage
The key difference between the two concepts is that, contrary to the conventional mortgage system, borrowers do not need to pay a specified interest rate over and above the principal amount of money they borrow to buy homes the Islamic way. The process of obtaining a halal mortgage has some slight differences when compared to obtaining a traditional mortgage but it is very similar with a few exceptions.
How To Buy A Home By Using Shariah-Compliant Financial Resources?
The mortgage services offered by Islamic financing institutions may be different in every country. However, when looking for a halal mortgage, the general rule is that you should approach those banks or institutions that can prove that they work in a Sharia-compliant way and that they have been advised by an independent Islamic sharia law authority. The said authority should comprise religious scholars and Islamic finance professionals
When looking for lenders that offer Halal mortgages, it is always advisable for Muslims to undertake additional due diligence on the terms and payments being offered by the bank in question.
Buyers should then compare the terms and processes offered with other Islamic finance lenders on the market. They should thoroughly go through the contract the Islamic mortgage financing institution offers to them before signing it.
Are Halal Mortgages More Expensive Than the Traditional Ones?
Based on the available data we tend to say to answer this question. Yes, they are a bit more expensive than traditional mortgages. Why many factors are beyond the control of your lender.
For Muslims looking for Halal mortgages to purchase property, they normally need to ensure that they have a large deposit ready. Lenders offering Halal mortgages will usually have higher administration costs than their traditional counterparts.
Additionally, in exchange for not having an interest payment element anyone who takes on a Halal mortgage may need a deposit of up to 20%. You should also factor in the costs of a survey, insurance, fees, stamp duty, and legal fees.
Before deciding on a lender, it is good practice to verify independently whether the Islamic home financing institution has a good reputation in the market.
What Are the Risks Associated With Halal Mortgages?
Ethically, halal mortgages are far superior to traditional mortgages. Both parties in a halal mortgage transaction are beneficiaries. The risks may not be the traditional risks associated with non-halal mortgages (for example, increases in interest rates every few years), but you are still likely to face penalty payments if you have a co-ownership agreement with the bank for the property. This means that if you fail to make payments on time then you could be fined or face repossession.
One thing to watch out for when you are looking for Islamic mortgages is the stamp duty costs. Normally, a buyer pays stamp duty when they purchase a property (if the property is over the UK stamp duty thresholds). With halal mortgages, as the bank is buying the property and then you are buying from them, this equates to a double payment of stamp duty.
Of course, the stamp duty costs also depend on whether you are buying your property back from the bank, or whether you have a co-ownership agreement with them. You should discuss the stamp duty costs with the bank before taking on the mortgage.
You should also note that although the bank legally owns the property, you may need to ensure the property and deal with the general maintenance and upkeep of the property. Always make sure to add any additional costs to your overall purchase plan.
Procedure for Engaging in a Halal Mortgage
The process relating to taking out a halal mortgage is very similar to that of a traditional mortgage. This is what normally happens:
- The buyer will choose a property
- The buyer will negotiate and agree on the price with the seller
- The Islamic mortgage provider/bank will buy the property
- The bank will sell the property back to you at a higher price
- As a buyer, you will repay the bank in a series of installments
With a traditional mortgage, you would then take a loan from a bank and begin paying the repayments. With an Islamic mortgage, there is no interest payable. Instead, the bank will buy the property and sell it back to you for a higher price. This is a form of halal refinancing arrangement.
For example, if the property is valued at £100,000, the bank may sell it to you for £140,000. As a buyer, you can repay this sum over some time. You should note that there are usually administration fees associated with halal mortgages, as there are with traditional mortgages. However, the fees for Islamic mortgages are usually lower.
Are There Any Benefits of Halal Mortgages?
The most obvious benefit is that halal mortgages are not susceptible to fluctuating interest rates. As there is no interest payment element, as a buyer you will not have a changing rate of repayment.
However, if you have a lease agreement with the bank you may find the repayment rate is subject to change. This is why it is important for Muslims to assess the terms of the halal mortgage.
Ultimately, the risks associated with halal mortgages are minimized on account of the bank share the risk with the buyer. Once the bank has agreed to sell the property at a fixed price, this price cannot change irrespective of market conditions.
As the Islamic finance world continues to grow to meet the growing demand from Muslims across the globe, so too are the options for halal mortgages. Islamic finance has firmly entered the mainstream finance world.
In addition, as Halal mortgages are seen as ethically sound many non-Muslim customers are also keen to take advantage of the terms offered by Sharia-compliant banks.
However, things are not that straightforward across the board. For example, although, there is a huge demand for Halal mortgage services, there are no financial institutions offering these services.