When you read in the news last week about the government entertaining the idea of opening up more products in the mortgage space, I’m sure Halal caught your interest.

These are very unique mortgages and it is important to understand the concept behind them and how it affects how Canadians can access mortgage funds.

First and foremost, what is a Halal mortgage?

 

What Is A Halal Mortgage?

 

Mortgage payments consist of both an interest and principal portion to pay down the loan and service the funds borrowed.

In Islam, it is taught that one should not earn or pay interest.

You can see how this might affect someone who is Muslim here in Canada. The only way to obtain a home is by way of a down payment and mortgage, which in today’s age, is having the mortgage component become more and more as prices increase.

So what is a Muslim in Canada to do if the mortgage payment forces a portion of the payment to be paid in interest?

Well, there are different costs to a mortgage, which the different types of Halal mortgages can offer.

Halal Does Not Mean Cost-Free

Halal mortgages all have a cost associated when the repayment of the loan. However, as we go through the different types of Halal mortgages, you will see that the costs are fixed or baked into the loan, not a separate component like interest.

But the costs are still there and could potentially be more than a regular mortgage payment with interest.

 

The Different Type Of A Halal Mortgage

 

There are many different forms of a Halal mortgage, we will go into each here briefly.

 

Mushraka

 

This form of a Halal mortgage is basically a co-ownership agreement with the borrower and the bank.

As the mortgage matures, the borrower becomes a higher percentage owner in the home as they make scheduled payments.

You can see how this can become problematic because of the high risk for the lender to take on all of the risk while the borrower is starting with a smaller stake and lower risk. Things like changes in market conditions, the borrower misses a payment, or disputes on selling down the road can arise.

 

Ijara

 

The next form of a Halal Mortgage is called Ijara, which is structured as a rent-to-own model. Instead of being purchased with the borrower and lender in co-ownership like Mushraka, Ijara mortgages are purchased by a trust and leased to the eventual owner. With each payment, they are contributing to eventual ownership.

Like rent to own, it can come with its challenges. Issues with rent payments and taxes can arise from this form of mortgage and would have its challenges taking off in Canada.

 

Murabaha

 

Murbaha is the final type of Halal mortgage, which is the bank buying the home and selling it back to the borrower at a higher principal cost. There is still no interest in this form of mortgage since the bank is selling the home at a higher cost than the property is worth.

This form has more issues for the lender when you consider the cost of land transfer in some jurisdictions, the capital gain cost since it is not their primary residence and the manipulation of prices of the property that is changing hands.

 

Why Isn’t This Form Of Mortgage Accepted?

 

As you can see from each of the types of Halal mortgages, each one comes with immense risk for the lender. From co-owning a property where the borrower might not be so keen to act in step with the lender, to Ijara and the rent-to-own model where the borrower is not tied to the property at all to finally the capital cost and tax implications of the third type.

These types of mortgages are important for Muslims and can become a choice for them, but the challenges for the lenders will only make them consider increasing the baked-in cost for these mortgages.

At the end of the day, the interest rates provided to consumers are based on their risk to the lender. These mortgages are no different and will carry their costs, whether the lenders will come on board is yet to be seen.

If you have any questions about your mortgage or obtaining one, please feel free to set up a call with me to discuss. I’m more than happy to help.

→ Setup Your Discovery Call Today, Click here.

Take care,

Aly

 

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