Guide to Islamic Home Loans
For those of the Islamic faith, there are a number of principles beyond price and savings that can influence your ability to grab a slice of the real estate market.
Australia is home to a multitude of cultures, with the vibrant Islamic community being one of many that continues to grow. In recognizing the Islamic faith, it is important that we understand the financial principles that underpin Islamic home loans, forming a key part of Islamic culture – existing as long as Islam itself.
In this article, we will look at the fundamentals of Islamic home loans covering:
Are you buying a house or looking to refinance? The table below shows home loans with some of the lowest interest rates on the market for homeowners.
|Rate Type||Gap||Redraw||Ongoing charges||The initial costs||LVR||Lump sum reimbursement||Additional refunds||Pre-approval|
|FEATUREDLIMITED TIME OFFER|
Smart Booster Home Loan Discounted Variable – 2 years (LVR
|FEATURED100% COMPLETE CLEARING ACCOUNTNO APPLICATION FEES OR ON-GOING FEES|
Low Rate Home Loan – Premium (Principal & Interest) (Owner Occupant) (LVR
|FEATUREDZERO APPLICATION FEESCOMPENSATION WITHOUT COST|
Homeowner Accelerates – Celebrate (LVR
|FEATUREDAN EASY DIGITAL APPLICATION|
Careful variable real estate loan (capital and interest) (LVR
|FEATUREDREFINANCING IN MINUTES, NOT WEEKS|
Owner Occupied Variable, Principal & Interest (Refinance Only)(LVR
- Fast turnaround times, can meet 30 day settlement
- For purchase and refinancing, down payment min 20%
- No ongoing or monthly fees, add 0.10% compensation
What is an Islamic mortgage loan?
The underlying principles of Islamic finance state that one should work for profit, and simply lending money to someone in need does not count as work. Under Islamic or Sharia law, money should not be allowed to create more money. This is known as the principle of riba, which means that your money is strictly prohibited from earning or paying interest in any financial institution because you have not done any work to earn that interest.
The interest-based home loans that dominate our market typically allow people to borrow money from a bank, buy a house with that money, and then repay the money over a fixed term to the financier with interest. Under Sharia principles, Islamic home loans allow you to finance your property purchase with an alternative financial product that ultimately does not earn conventional interest.
How do Islamic home loans work?
Like any home loan, Islamic loans start when you choose a property. From there, the process is tailored specifically to Islam, with your lender agreeing to purchase it. In return, you enter into an Ijarah Muntahiyah Bittamlik or “lease” agreement to live in the property for an agreed term and pay rent to the lender.
At the end of this agreement, the lender will give you the property as a gift. The principle of Ijarah Muntahiyah Bittamlik means that you are never actually in debt, but have a safe house that you will eventually own.
Besides Ijarah Muntahiyah Bittamlik, there are other Shariah-compliant Islamic home loan options to help you buy property.
Translated as “profit and loss sharing,” Mudarabah is similar to a partnership in which one partner lends money to another to invest in a business venture. The terms of the Mudarabah state that the first partner invests in the business while the other has the responsibility to manage and work on the investment. In doing so, each partner shares responsibility for the loan.
Musharaka or “partnership” means that you and the Shariah-compliant lender buy the property with the intention of gradually buying it back from the lender.
For example, say you were to have a down payment of 20% of the total purchase price, lenders will pay the remaining 80%. You then have to pay monthly rent on the 80% share to the lender, as well as buy more equity in the property. The more shares you own, the less rent you pay to the lender until you become the owner of the property at the end of the loan term.
Currently only offered in Victoria, a Murabaha plan is where the lender will buy the property you want and resell it to you immediately at a profit. By purchasing the property, the lender is considered to be working under Shariah. Under a Murabaha plan, you are required to pay fixed monthly repayments on the higher price without paying interest to the lender.
Murabaha differs from a traditional home loan agreement in that the final repayment amount is agreed between the parties in advance, eliminating any ambiguity and creating a higher degree of transparency. Under a traditional loan agreement, the final amount repaid is unknown as there may be variability in the repayment rate over the life of the loan.
Similar to a buyer’s attorney, under Wakala an agreement is made with the lender to work as your agent. By doing so, the lender can use his money to invest in sharia-compliant business activities to generate a target profit for him.
Islamic Home Loan Eligibility
Applying for an Islamic home loan is similar to applying for a traditional mortgage loan, but as we explained above, the terms under which you receive your home loan vary in accordance with Shariah.
Essentially, Islamic home loan applicants will need to document their income to demonstrate their borrowing capacity and provide proof of their expected deposit. As with a traditional home loan, lenders will assess credit history, employment details, dependents, expenses, liabilities, and property details to determine your eligibility to service a home loan.
It is important to note that belonging to the Islamic religion is not a requirement of the eligibility or application process.
Advantages and Disadvantages of Islamic Home Loans
- Sharia Compliant – This method of home loans aligns better with Sharia to provide people of Islamic faith with a way to access property.
Characteristics – In most cases, you are offered the same features as a typical home loan.
Pre-approval – Your lending institution can pre-approve your situation, allowing you to immediately choose a home that falls within the agreed price range, making your application process easier.
Covered by the National Consumer Credit Protection Act – This means that all Islamic loans are covered by responsible lending obligations, including the assessment of the unsuitability of a credit product or an increase in the credit limit.
- Limitations of choice – May be limited by a smaller number of loan providers and offers to meet Shariah requirements.
The two cents from Savings.com.au
Breaking into the housing market can be tricky, especially when it comes to choosing the right home loan that meets your needs. For those who worship Islam, there is the added pressure of finding a home lender that recognizes Sharia, offering alternative interest-free home loan products. The growth of Islam across Australia has prompted a number of lending institutions to cater to Islamic finance provisions through a range of home loan products in their portfolios.
Just like a traditional mortgage, Shariah-compliant lenders offer pre-approval, which means you can assess your budget before bidding on a home and get unconditional approval. Generally, you may find your home loan more expensive than a traditional loan due to the unique nature of Islamic loans and pressure from lenders for greater profits. It is important to note that anyone can apply for an Islamic home loan and the application is assessed based on your financial situation, not your religious beliefs.
For those who are interested in an Islamic loan but do not adhere to Islam or any religion for that matter, it is rare for lenders to offer Islamic mortgages simply because the benefits usually do not outweigh overall costs.
Image by Konevi via Pixabay
The whole market has not been taken into account in the selection of the above products. Instead, a reduced portion of the market was considered. Products from some vendors may not be available in all states. To be considered, the product and price must be clearly published on the product supplier’s website. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au and Performance Drive are part of the Savings Media group. In the interest of full disclosure, Savings Media Group is associated with Firstmac Group. To learn how Savings Media Group handles potential conflicts of interest, as well as how we are paid, please visit the website links at the bottom of this page.