Inside: learn about what is halal mortgage, why it came into light, why Canada introduced it & what are the benefits of it
Have you heard about the new type of mortgage being introduced in Canada called a “halal mortgage”? You might be wondering, what exactly is a halal mortgage and how is it different from a regular mortgage?. Actually this word, particularly recently highlighted by the Trudeau government in recent federal budget of Canada, which aims to make homeownership more accessible to Muslims by aligning with Islamic financial principles. But what exactly are halal mortgages, and how do they work? This post will help you to understand what halal mortgage means, its benefits for homeowners, & how it support inclusivity.
What is Halal Mortgage Canada?
So simply, a halal mortgage is a way for Muslim homebuyers to get a mortgage that follows Islamic financing rules. The biggest difference is that halal mortgages do not involve paying interest, which is prohibited under Islamic law.
Why Are Halal Mortgages Needed?
Under Islamic laws, Muslims are not allowed to pay or receive interest on loans, as this is considered usury or “riba”. However, with regular mortgages from banks, the borrower has to pay interest on the loan over time. This creates an issue for devout Muslims looking to buy a home.
To solve this problem, financial institutions in many Muslim countries offer Sharia-compliant or halal mortgages that follow Islamic financing principles. These allow Muslims to get home financing without violating their religious beliefs about interest.
How Do Halal Mortgages Work?
Instead of charging interest like a conventional mortgage, halal mortgages are structured more like a lease-to-own agreement or home co-ownership between the buyer and bank.
There are a couple of other common methods used in Islamic religion:
1) Musharaka (Partnership)
With this model, the bank and homebuyer co-own the property from the start. The buyer makes payments to gradually increase their ownership share, while the bank’s share decreases over time until the buyer owns 100%.
2) Murabaha (Cost-Plus)
Here, the bank purchases the home outright first. They then re-sell it to the homebuyer at a higher price, profiting from the markup rather than interest. The buyer pays this higher cost back in installments over a number of years.
The key difference is that rather than going into debt and paying interest, the homebuyer either shares ownership initially or pays an agreed-upon profit markup. This complies with Islamic laws prohibiting riba (interest).
Canada’s Halal Mortgage
Until recently, halal mortgages weren’t available in Canada for Muslim citizens looking to buy a home. However, Prime Minister Justin Trudeau’s government has now pushed publicly-owned banks and housing agencies to start offering Sharia-compliant financing.
This is being done to promote greater housing affordability and inclusion for the over 1 million Muslims living in Canada. By offering halal mortgages, it opens up the housing market to this segment of society that was previously underserved.
Benefits of Halal Mortgages
In addition to being religiously permissible, halal mortgages offer some other advantages:
- No Interest Charges: This can make homeownership more affordable over time.
- Fixed Costs: Since profit rates are set upfront, the total cost is fixed and stable.
- Risk Sharing: Both bank and buyer share risks, rather than all burden being on borrower.
- Ethical Finance: Mortgages are viewed as more ethical and socially responsible.
As Canada is putting effort to become one of the first non-Muslim majority countries to bring halal mortgage in mainstream, it’s an important step in making the housing market accessible to people of all faiths and backgrounds.