If you're Muslim, then you may have wondered for a long time about how you can get a mortgage so you can own your own home and stay true to your religious beliefs.
In Islamic banking, charging interest is forbidden under Sharia law, so most home loans won't be appropriate for Muslims; thankfully there are Sharia-compliant mortgages and products available in Australia.
An Islamic mortgage is still a mortgage
Even though there's no interest on the loan, you can still use it to buy land, build a house or buy an existing property. Islamic mortgages aren't usually used for refinancing a property, though.
How do Islamic home loans work?
When you enter into an Islamic home loan agreement, you select your (hopefully dream) property and your financial institution buys it outright from the seller. Then, the institution agrees to lease the property to you for a set period of time - usually around 25 years - and this is known as Ijarah Muntahiyah Bittamlik.
Once you've made your final rental or lease payment, the institution transfers ownership of the property to you as a promissory gift, or hiba.
Are there lots of Sharia-compliant home loans on the market in Australia?
There's not a huge number of such products on the market, as the Muslim population of Australia is only around 2.6 per cent, but some of the bigger banks offer loans suitable for Muslims.
Westpac, Bank of Sydney and NAB offer mortgages and loans that aren't strictly Islamic but allow for Sharia money-related prohibitions. There are also a number of Islamic banks in Australia, including:
- Equitable Financial Solutions
- Amanah Islamic Finance
- MCCA Islamic Finance and Investments, and
- the Islamic Cooperative Finance Australia Limited (ICFAL).
Which Sharia principles are involved?
When you take an Islamic home loan, you'll be using a product that's devised with several principles in mind.
Ribā, the prohibition of charging or paying interest
Islamic law says that interest can't be charged or paid on any financial transaction.
Gharār, the prohibition of uncertainty
Your lender can't be ambiguous or levy "surprise fees. You can, once the terms are laid out clearly, both take on the risk of the agreement.
Musharakah, equal sharing of profit and loss
Islamic law states that both parties share the gains and losses involved in the transaction. It's more of a partnership than a lender-borrower contract.
Musharakah Mutanaqisah, a diminishing partnership
A home loan is a musharakah contract in which one party - you - buys the equity share of the other party in instalments until they've bought the property in full.
How is an Islamic home loan different to a regular mortgage?
With a conventional, non-Sharia mortgage, you'd buy the property with a mortgage agreement that involves funds borrowed from the lender. You'd then repay the loan, with interest, over a set repayment period.
Your lender owns the security over the property, so if you stop paying the mortgage, the lender can force the sale of the property to recoup the outstanding money.
As you can see, the main difference between a conventional mortgage and a Sharia home loan is that the Sharia mortgage works by rent (also known as profit fee) and a regular loan uses interest.
Comparing Islamic home loans
Islamic home loans come with many of the features that are also offered with traditional home loans. Compare the features among different lenders before deciding which home loan is right for you.
Islamic home loans offer a lot of the same features as conventional mortgages, so you still need to compare the deals available to make sure you're getting the most suitable one for you. Here's what you should look at.
Early repayment terms
Find out if you can pay the amount off early, or pay a significant portion off early, without incurring a fee.
Your LVR
How your loan to value ratio (LVR) affects the amount you can borrow and how much your subsequent payments will be. Even with an Islamic mortgage, if you have less than a 20 per cent deposit, you'll have to pay Lender's Mortgage Insurance (LMI).
Can you adjust the frequency of your payments?
You might want to pay fortnightly or even weekly, so make sure that your institution will let you do this.
Your rental or profit rate
Although you won't be paying interest, you'll be paying more than the selling price in the form of your rental or profit fee. Find out how much the rate is and what your eventual total repayment amount will be.
Are there any ongoing fees?
Some institutions apply annual account management fees that can bump up the cost of your monthly payments, so look for deals with low or no fees.
Other things to consider
You'll be buying a home in a way that's consistent with your religious values and teachings. You may have been waiting some time to do this!
Most Islamic mortgages have broadly the same features as regular products, including the option to overpay or even just to pay the lease amounts.
Most Sharia-compliant institutions offer pre-approval so you know the price bracket to concentrate on before actually applying for the mortgage.
You may find your deal more expensive due to the particular nature of Islamic mortgages and the fact that there aren't many providers.
The prohibition on ambiguity often means that your provider will want to see very clear evidence that you can pay your mortgage and that you have a long history of sound financial management. There's no "low doc Sharia mortgage.
You'll have to show that you have the deposit ready to go and also declare any other assets, liabilities or debts that you have. There's no escape from legal fees, conveyancing fees or stamp duty, either!
You don't have to be Muslim to apply for a Sharia-compliant mortgage
Anyone can apply for an Islamic mortgage and the application is assessed on your financial circumstances, not your religion (or even lack of).
It's rare for institutions to suggest Islamic mortgages to non-Muslims simply because there's not much extra benefit to be had if you're not concerned about adhering to religious principles.
Compare home loans from Australia's major banks, credit unions and other lenders at InfoChoice.
The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.
