Victor Tran, a mortgage and real estate expert at Ratesdot.ca and broker with True North Mortgage, said a halal mortgage is almost like a traditional mortgage where the lender and the homeowner have shared ownership of the property, but there are extra steps involved.
He said the difference is that “instead of charging interest to the homeowner, the contract is structured in a way where there’s a fee charged.”
Even though halal mortgages are interest-free, it doesn’t mean the lending happens at a zero per cent charge, Sawwaf said.
“It just means that you’re not part of a transaction where money is being lent and you have to pay more money back,” Sawwaf said.
“That is the principle of usury within Islam and other Abrahamic faiths that we’re trying to avoid.”
Usury, which is the lending of money at exorbitant interest rates, is also prohibited in Judaism and Christianity.
Halal mortgages in Canada fall under three different types of agreements, called Ijara, Murabaha and Musharaka, according to Rates.ca.
Ijara is like a rent-to-own agreement in which the inhabitant of the home starts as a renter and becomes the owner upon final loan payment, Tran said.
Under this type of financing, the home is purchased by a trust, which then leases it to the customer.
The Murabaha is a cost-plus financing structure in which an Islamic financial company becomes the owner of a home and sells it to their client for a price that includes a profit rate, which is benchmarked against the Bank of Canada’s overnight lending rate, Tran explained.
The client enters into a purchase agreement that specifies fixed monthly payments for the duration of the contract, which is usually up to 15 years.
Under the Musharaka arrangement, an Islamic financial company and its client become co-owners of a home, Tran said.
Throughout the mortgage term, which will follow the traditional mortgage term of up to 25 to 30 years, the financial company’s equity position decreases and the customer’s equity position increases proportionately as they pay out the owned balance.
At the end of the contract, the client will have 100 per cent home ownership and the company will have zero per cent, Sawwaf said.
From the financial standpoint, one of the main benefits of halal mortgages is that it introduces a long-term fixed mortgage rate, Sawwaf said.
For instance, under the Murabaha agreement, which follows the buy-and-sell structure, the mortgage can run up to 10 to 25 years.
Sawwaf said because the lender is sharing in the long-term risk, halal mortgages are “much more ethical and valuable at the end of the day” as opposed to having a debt-based system that is “not really good for society and its long-term social impact.”
However, the downside is that the costs of halal mortgages are higher because the lenders are not able to access low-cost capital, Sawwaf said.
“We’re hoping that the government signalling that they’re in support of halal mortgages with respect to potential legislation or policy changes, this could allow us to tap into institutional capital at the banks or other institutions,” he said.
Tran said because the costs and fees are a little bit higher for a halal mortgage than a traditional mortgage, it may not be a financially feasible option for many.
Among the measures that Ottawa is exploring are changes in the tax treatment of halal mortgages or a new regulatory sandbox for financial service providers.
Anyone in Canada, Muslim or non-Muslim, can apply for a halal mortgage, which is currently offered by a few financial institutions.
“Everyone is allowed to have a halal mortgage no different than you can go to any restaurant and eat a shawarma with halal chicken in it,” Sawwaf said.
“We don’t care what your background is, your religion, your creed, even if you’re non-religious or an atheist.”
As for the down payment, most lenders in Canada require clients of halal financing to pay a minimum of 20 per cent of the market value, or purchase price, of the house.
Customers should also have a good credit history and sufficient income to meet the monthly payment obligation, the Canadian Halal Financial Corporation says.
