A halal mortgage is a mortgage elaborated in accordance to the principle of Islamic finance which doesn’t allow the use of interests within any financing.
Halal mortgage’ purpose to replicate the economics of the conventional mortgages while remaining compliant with the Sharia law of Islamic finance.
Islamic mortgage is different from a conventional mortgage where the home buyer borrows money from a bank which is then repaid with interest, Sharia compliant Islamic mortgages are based upon the Islamic finance principles of a co-ownership (Diminishing Musharaka) and leasing (Ijara).
Halal mortgage is becoming nowadays very popular and is dedicated to Muslims as well as non-Muslims who are opting for an ethical way to finance their future home and more and more Islamic banks are offering them a financing solution in accordance with the principles of Islamic Finance by using a Halal loan.
Islamic banking products are in the context of real estate financing can be divided into two distinct categories: the first one being Murabaha and Ijarawhich are financing options that do not rely on profits and losses sharing. The second category which consists of Moucharaka and Moudaraba are financing solutions which include a sharing of profits and losses.
THREE MAIN TYPES OF ISLAMIC MORTGAGE
The three main types of halal mortgage are Ijara mortgage, Murabaha mortgage and diminishing musharaka mortgage .
The main difference between Murabaha and Ijara is that with an Ijara mortgage (leasing mortgage), the property will not immediately be registered under the buyer’s name, but he will be renting the property from the bank until full repayment is completed.
The third one consists of a diminishing Musharaka mortgage with the bank becoming a partner with the home buyer so that lender and borrower ‘co-own’ the house and the borrower gradually within an agreed period buys the bank's share of ownership.
Murabaha called also halal deferred sale finance is recommended by Islamic Finance to finance a home by avoiding the classic home loan structure which generates the Riba (usurious interest).
Murabaha for home financing is actually simple and asks the Islamic bank first to acquire the property itself, after owning it, it can then resell it to the borrower at a price added with a margin fixed in advance.
Withing islamic mortgage, the applied margin by the Islamic lender essentially corresponds to the cost of financing the deferred payment granted to a home buyer.
The main advantage of Murabaha mortgages (versus Ijara mortgage) is that from the first day, the property is registered in the borrower’s name with the repayment period and monthly repayment amounts agreed between both parties.
Halal mortgage via Murabaha fixes the terms of repayments of the mortgage with the possibility to repay the loan in full at any point without paying any penalty.
Murabaha mortgage flip side is that the buyer is required to provide with a percentage of the property upfront up to 20 per cent which makes this halal financing option adapted to people who are able to inject some capital.
Ijara mortgage called also lease to own is the Islamic home financing option where the property belongs to the bank after it has purchased it and the borrower will make monthly rental payments to the lender.
Ijara mortgages have proven to offer an important advantage in comparison to Murabaha, as it doesn’t require any initial payment or deposit from the future home owner.
At the end of the agreed term of an Ijara mortgage r once the price of the home has been repaid in full, ownership of the property is transferred from the bank to the initial borrower.
DIMINISHING MUSHARAKA MORTGAGE
Under a diminishing musharaka contract, the customer and the Islamic bank purchase the property jointly under a musharaka contract, loosely a partnership contract as understood by Shariah law. The customer will have exclusive occupation, and will pay the Islamic bank rent on that part of the property which is owned by the Islamic bank. The transaction is called diminishing musharaka because the partnership shrinks as the customer buys out the bank and ends once the buyout process is completed.
EARLY REPAYMENT OF AN ISLAMIC MORTGAGE
Murabaha contract do not allow in general to inculde early repayment provisions specifying how the bank will reduce the amount owed if the customer repays early. The Islamic lender will be reducing at its discretion the amount it demands for early repayment.
A mortgage Takaful or Islamic mortgage insurance is dedicated to cover the borrower repayment risks under Islamic law with his family acting as beneficiary of the insurance.
A large number of Islamic insurers are offering a Mortgage Takaful Plan to protect the borrower’s family by repayment of the debt through certificate proceeds in the event of his death or Total Permanent Disability (TPD).
The first private lender group consists of friends and relatives (family). Many borrowers address their financing needs to friends and family to fund a car or obtain an advance payment for a mortgage. This is an easy option as being well known as a borrower and trust being the basis of lending. However in case of difficulties to reimburse the loan, the damages on the relationship can become irreparable.