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Halal mortgages 101

Your guide to getting an Islamic mortgage in Canada

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What is a halal mortgage?

Halal is a term that signifies compliance with Shariah, the Islamic religious law which does not allow for the use of Riba, also known as interest. This is because interest is regarded as an arrangement that exploits the poor (the lendee) while rewarding the rich (the lender) who is without pressure to add extra value.

Until halal mortgages were established, many Muslim Canadians were unable to purchase a home with a mortgage while also maintaining their faith.

As Canada’s Muslim population continues to grow, financial experts anticipate that demand for Islamic financing options will also increase.

Types of halal mortgages

Halal mortgages are Shariah-compliant, structured according to underlying principles known as Ijara, Murabaha or Musharaka.

Each is described below:

  • Ijara: Like a rent-to-own agreement in which the inhabitant of the home starts as a renter and becomes the owner upon final loan payment. Ijara financing sees the home purchased by a trust which then leases the home to the customer.
  • Murabaha: Refers to a cost-plus financing structure in which an Islamic financial company becomes the owner of a home and sells it to their client for a price that includes a profit rate which is benchmarked against the Bank of Canada’s overnight lending rate. The client enters into a purchase agreement which specifies fixed monthly payments for the duration of the contract (usually up to 15 years).
  • Musharaka: An arrangement that sees an Islamic financial company and its client become co-owners of a home. Each party is named on the title of the home, though the client lives in it. Throughout the mortgage term (up to 30 years) the financial company’s equity position decreases.

Qualifying for halal mortgages in Canada

The requirements for a halal mortgage depend on what type of agreement the lendee enters with the lender, who will lead the qualification process.

In general, the lender must gauge what collateral is available to help manage any risk they assume by purchasing the home – whether it’s by Murabaha or Musharaka.

Typically, a deposit of 5-35% is required.

Lendees should also expect that they’ll be asked to reflect the income they have available to make monthly payments. Depending on the lender, the qualification process may require a credit check. In Canada, that can only be done with permission.

Which Canadian lenders offer halal mortgages?

Each financial institution that offers Shariah-compliant mortgages in Canada is an associate member of The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).

This international not-for-profit, which is based in Bahrain and regulated by the central bank of Bahrain, is dedicated to the standardization and harmonization of international Islamic finance practices and financial reporting in accordance to Shariah.

Some of those that offer Halal mortgages, include:

  • Canadian Halal Financial Corporation
  • Eqraz
  • Manzil

Manzil is a Canada-based company that considers itself the only provider of Islamic finance in Canada that follows all guidelines for Shariah governance established by AAOIFI.

The pros and cons of halal mortgages

Pros

  • Shariah-compliance means that Muslims in Canada can purchase a home while also maintaining their faith.
  • Fixed rates rather than variable.
  • Owner may avoid any penalties associated with a traditional mortgage if they opt to sell the home before the mortgage is paid off.

Cons

  • Monthly payments may be slightly higher than a traditional mortgage because the profit rate may be included in the mortgage loan amount, depending what type of halal mortgage selected.
  • Fixed rates mean that the monthly payment will remain the same even if the value of the home decreases.
  • With the Musharaka financing structure, co-ownership is required.
  • Higher deposit may be required.

Frequently asked questions about halal mortgages

All your questions about halal mortgages, answered.

Can I get a halal mortgage in Canada?

Yes, there are several financial institutions in Canada that now offer halal mortgages. We recommend that applicants work with a financial institution that can confirm it’s an associate member of The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).

This international not-for-profit, which is based in Bahrain and regulated by the central bank of Bahrain, is dedicated to the standardization and harmonization of international Islamic finance practices and financial reporting in accordance to Shariah.

Are Islamic mortgages actually halal?

Any financial institution in Canada that offers halal mortgages will be able to reflect on what it considers its product to be Shariah compliant. Manzil, a Canada-based company, considers itself the only provider of Islamic finance in Canada that follows all guidelines for Shariah governance established by AAOIFI.

Are Islamic mortgages more expensive?

Depending on the type of halal mortgage, monthly payments may be more expensive than for a traditional mortgage. In the case of Murabaha home financing solution, fixed monthly payments are made against a loan amount which has been marked up over a fixed period.

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