The Islamic faith provides guidelines to help Muslims lead their best lives. In addition to spiritual guidance, Islam outlines various financial principles to help Muslims align their personal finances with Islamic values.
In particular, Islamic personal financial principles help potential homeowners secure a Halal loan when purchasing a home. Since Islam doesn’t allow lenders to charge interest on loans, the Australian Muslim community is best served by a custom Islamic finance loan tailored to follow the Shariah laws.
Different ways to take out an Islamic home loan
In general, there are three types of Shariah-compliant home loan options. They include:
- Musharaka: In this joint ownership arrangement, the lender buys the home and allows you to gradually buy them out through monthly payments.
- Ijara: Ijara is a lease-to-own agreement in which the lender purchases the home and leases it to the buyer at a set monthly rate.
- Murabaha: Murabaha is a cost-plus-profit sale agreement — the lender buys the home and sells it to you at a higher price.
How does an Islamic home loan differ from a traditional home loan?
Islamic home loans differ from standard mortgage loans because they don’t charge interest. Typically, you’ll likely use an Ijara or Murabaha financing when buying a home.
With Ijara financing, the lender provides the finances to purchase the home. You then co-own the house with the lender, which allows you to use the property while making monthly repayments.
One portion of the monthly payment pays the lender for the right to use its equity interest in the property. The second portion pays down the loans to let you build home equity.
With Murabaha financing, the lender buys your dream house and sells it back at a profit while allowing you to pay for it in monthly installments. Murabaha differs from a conventional mortgage because the lender buys the house and sells it to you.
If you put 10% down when buying a $300,000 house with a 30-year Muslim home loan, the total cost would depend on the option used. The home would cost $594,000 under Murabaha financing and $432,000 with Ijara financing.
What are the essential features of an Islamic home loan, and what makes it Halal or Shariah-compliant?
A home loan can be classified as Shariah-compliant if it meets these requirements:
- The money must come from a Shariah-compliant fund, such as an Islamic investment fund.
- The loan may only fund a Halal purchase.
- The loan complies with the relevant regulatory requirements and the Islamic Ijara rules.
- All parties must conduct themselves fairly, equitably, and transparently.
How do I qualify for an Islamic home loan?
You may qualify for an Islamic home loan by demonstrating that you intended to use the property for Shariah-compliant activities. You may not use the home loan to finance the purchase of a property that’ll be used for activities considered Haram.
What place do Shariah-compliant home loans have in the Australian market?
Australia is home to more than 800,000 Muslims, and the population has been on a steady rise since 2016. Introducing Islamic halal mortgage in Australia can benefit up to 3.2% of the country’s population. Muslim home loans can help the Muslim faithful become homeowners without going against their religious beliefs.
What are some potential pros and cons of an Islamic home loan?
Since Muslim home loans are Shariah-compliant, they feature an Halal overlay that governs their usage. While that may limit how you use the home loan, the resultant peace of mind is priceless.