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What Type of Mortgage is Halal and How Does it Work?

Learn about halal mortgages: what they are, how they work, and why they are becoming increasingly popular among Muslims.

What Type of Mortgage is Halal and How Does it Work?

An Islamic or halal mortgage is a financing option that allows Muslims and others to purchase a property in accordance with sharia law. Unlike traditional mortgages, halal mortgages do not involve interest, which is prohibited by Islamic law. Instead, they are referred to as homebuying plans and involve making monthly payments that are partly rent and partly capital to finance the final purchase. This means that the share in the property remains constant throughout the term.

The main reason why many Muslim scholars and leaders consider traditional mortgages to be haram is because they involve interest, also known as usury or riba. As a result, Islamic mortgages typically have fewer fees and charges associated with them. However, some have criticized this concept for its similarity to a traditional mortgage. When taking out an Islamic mortgage, you will need to pay a deposit of between 5% and 35%.

The average mortgage in Australia lasts between 10 and 30 years, so you can expect to pay tens of thousands of dollars or more in rent over the course of the loan. Mortgages and Islamic home purchase plans are regulated by the Financial Conduct Authority, which means that all providers must protect their customers' interests. In a standard mortgage, money is transferred to the seller and then returned with interest. The Murabaha agreement is often criticized as haraam because of its similarity to a traditional mortgage.

In this agreement, the Islamic mortgage provider will charge you rent on your behalf or sell the property to you at a higher price. It is important to note that taking out a mortgage is different from lending money and earning interest on it. It is also worth noting that many Islamic and halal mortgage providers use values linked to LIBOR to set rent, rather than using the average levels of their local area as a guide. There are two other important concepts related to the financial mechanics of mortgages: Gharar and Maysir.

A halal mortgage broker specialist with experience in these types of mortgage alternatives can help you choose from the many different products available. Halal financing is becoming increasingly popular and, according to some experts, it's only a matter of time before it becomes as competitive as the standard mortgage market.

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