A mortgage is a convenient way of buying a home, whether you are on a tight budget or don’t want to tie up your finances in a singular asset. A financial institution provides the funds necessary, allowing you to make payments over many years.
When in the market, you’ll come across two mortgage options: Conventional and Islamic mortgages. Conventional mortgages are considered haram as they charge interest, but Islamic mortgage plans offer an alternative that aligns with Islamic principles.
In this article, we define the two and examine their key differences.
What are Islamic Mortgages?
Islamic mortgages operate on the fundamentals of Islamic finance, prohibiting charging or paying interest. Instead, they follow a structure that complies with Sharia law.
Simply put, an Islamic mortgage is a home financing arrangement in which the lender doesn’t charge interest. Instead, they buy the property on the borrower’s behalf and charge rent or lease.
Islamic mortgage plans by Hejaz Financial Services offer a Sharia-compliant alternative. These mortgages are tailored to Islamic principles and offer home financing solutions for individuals looking to adhere to their religious beliefs.
The financial institution can either buy the property in full and sell it at a higher price to factor in the risk, or they can charge you for using their share of the property. This is different from charging an interest.
What are Conventional Mortgages?
A conventional mortgage involves borrowing money and paying it back with interest. No asset is at stake because the lender has nothing to do with the home. Instead, the financier grants the homeowner access to a predetermined sum in exchange for a commitment to make interest payments later.
This approach creates an unequal and uneven relationship in which the lender has all the authority and benefits from the buyer’s needs.
Differences Between Islamic and Conventional Mortgages
Here are the key differences between these two mortgage types:
Interest Rate
One key difference between a Muslim mortgage and a traditional one is the lack of interest (riba).
Shariah law dictates that lending money to profit from any investment or commercial activity isn’t an acceptable commerce method. Muslims are prohibited from charging interest and benefitting from it because, in Islam, a loan should be a form of charity. Because of this, Islamic mortgages do not have interest rates.
On the other hand, conventional mortgages charge interest. Borrowers are given money with terms and conditions of paying interest on the principal amount. Depending on several factors, interest rates can range anywhere between 1.99% to 8%.
Property Ownership
In an Islamic mortgage, the lender and borrower own shares. The lender has ownership of their share until the borrower completely pays off the amount. With the whole amount paid off, the property is then transferred to the borrower’s name. However, it’s important to remember that property transfer varies with different ownership models. In a partnership model, for instance, the borrower will own the property lease. After the lease amount has been paid off, the property is transferred to the borrower’s name.
In conventional mortgages, the lender can only legally seize the property if the borrower defaults on the loan. Other than that, the borrower owns the property, who has the right to sell it whenever they want to get their money back.
Additional Charges
Since Islamic mortgages are Sharia-compliant, additional charges such as prepayment and late payment fees aren’t charged. Instead, both parties agree upon a monthly instalment that includes all the charges, exempting the borrower from paying any hidden fees.
Under conventional mortgages, borrowers are penalised if they are unable to make the instalment payments by the prearranged date. Additionally, the penalty grows over time and may cause legal issues for the borrower.
Financial Risk
Islamic mortgage offers the borrower ownership or financing models. As a result, the borrower and lender will also equally share risks when they arise. In case of any foreclosure, both the lender and borrower will share the responsibilities equally. Another aspect of this is that the borrower cannot sell the property while the mortgage is in effect. You can only claim full ownership once everything is paid off, but this is only because it’s not a loan with interest.
