What is Halal Mortgage? How Does Islamic Mortgage Work?

How Does Halal Mortgage Work?

Islamic mortgage is a home loan based on the principles of Sharia, which precludes the instalment or receipt of intrigue. A bank purchase a house or plot, an re-sale it to the “borrower” for financial benefits, through one of the Islamic financial instruments. Different composes include the Islamic bank turning into a cooperate with the “borrower” so both co-possess the house or business, a situation in which the borrower bit by bit purchases proprietorship with a progression of instalments. However, there are different Islamic banking and finance products that can be used for Islamic mortgages. Some of these are listed below:

1. Murabahah for Islamic Mortgage

Murabahah is an Islamic finance mode used for halal mortgage, and it works based on cost plus profit.  Using the model the price of the product, such as the house to be sold, and also the profit being taken by the Islamic financial institution is known to the two parties. The buy and banks’ profit must be unmistakably disclosed to the customer at the time of the deal assertion. The installation of the Murabaha cost might be in a spot or in portions during an agreed timeframe.

The Islamic financial instruments are discussed in more detail in AIMS’ MBA Islamic finance degree, online Islamic banking diploma, and Islamic banking and finance courses. These programs also lead to PhD Islamic Banking and finance program for advance learners.

2. Ijarah for Islamic Mortgage

If you are planning to get a Muslim mortgage, Ijarah is an Islamic leasing model, which is more reliable option. Here are the key steps to be followed for halal mortgage through Ijarah.

Step-1: Find a house to buy and get a real cost with the lender.

Step 2: Likewise, in any home loan, the buyer agrees to the amount of the loan with the Islamic bank. The Islamic bank will then buy the property for resell to the customer.

Step-3: Customer, at that point goes into two concurrences with the Islamic bank:

• The customer will pay an agreed-upon lease monthly to the Islamic Financial Institution.
• Pay back the total agreed price in terms of rent on regularly scheduled payments, usually no more than 25 years.

Step-4: At the point when the price has been completely reimbursed to the Islamic bank, the title of the property is completely transferred from the Islamic bank to the customer.

2. Diminishing Musharakah-Based Halal Mortgage (Diminishing Partnership)

Diminising Musharakah is type of Islamic partnership where the bank and the buyer jointly purchase the property. Unlike the Musharaka model, however, the aim here is to gradually reduce the bank’s share in the property. Hence, the term ‘diminishing.’

• The buyer rents the Islamic bank’s share of the property and buys the shares gradually over time.
• This allows the buyer to eventually become the sole owner of the property while complying with the principles of Islamic finance.

Checklist Before You Apply for a Home Loan

To ensure your Islamic mortgage is truly Halal and Shariah-compliant, you need to verify several key points:

1. Shariah Advisory Board

The lender should have a reputable Shariah Supervisory Board comprising Islamic scholars.

2. Clear Contract

The contract for the halal mortgage should be clear, stipulating that money lending with interest (Riba) is not involved. Make sure that the agreement does not contain any hidden terms or conditions that could contradict Islamic principles. Ideally, according to the Shariah principles, the debtor should write the contract.

Also, Allah says in the Quran, Surah Baqarah, Ayah 282: “O you who have believed, when you contract a debt for a specified term, write it down. And let a scribe write [it] between you in justice. Let no scribe refuse to write as Allāh has taught him”. 

3. Risks, Profit and Loss Sharing

Check whether the contract includes a profit and loss sharing arrangement. In a truly Islamic loan, the risk must be shared between the lender and the borrower. One may easily understand the key Shariah rules for risk management.

4. Asset Backed Financing

The halal mortgage or any Islamic financing should be asset-based, meaning that a physical asset, such as a house or car, should be a part of the transaction. In Islam, money cannot generate more money – it must come from a tangible asset.

5. No Penalties for Late Payment

Islam prohibits taking advantage of someone’s hardship. Therefore, a halal mortgage should not impose any penalties for late payment.

6. Recognition from the Regulatory Body

Ensure the local or international regulatory bodies recognize the lender.

Is Islamic Mortgage Really Halal?

Muslim mortgage has some similarities with the Conventional banking system. However, their rules are based on the principles and sources of Islamic law for Islamic Banking and Finance. The interest payment is prohibited, according to a Hadith: “All types of increase are riba and henceforth restricted.” Islamic guidelines on exchanges have been made to anticipate the utilization of intrigue. For example, with a Conventional home loan for asset, the borrower would pay a charge premium on borrowed money.

A Sharia mortgage usually has a few conditions to get the property:

1. A Murabaha plan is where the bank will purchase the property you need and quickly offer it for resale. The name can mean ‘benefit’ inexactly.
2. In Ijarah, you pay installment month-to-month payments at a higher cost without paying any enthusiasm back to the Islamic bank. For example, if the bank purchases a property worth $300,000, it might resale it to you for $350,000, and you should pay the whole in an agreed period in the form of rent.
3. In a Wakala (Agency agreement), you agree with the bank that they will fill in for you as your specialist. By doing this, the bank can use its cash to put resources into Sharia-compliant exchange exercises to create an objective benefit.

Islamic Mortgage vs Conventional Mortgage

There are huge differences between Islamic banking and conventional banking.

1. Under a Shariah mortgage, the premium isn’t paid and is supplanted by a rental installment (incase of Ijarah) to the bank until the back is reimbursed.
2. There are no confinements for non-Muslims to utilize Islamic banks as well.
3. Due to the additional regularity requirements, the expenses and terms are fundamentally the same for keeping pace with Conventional system.

Avoiding Conventional Penalty Practices in Islamic Mortgage

In a halal mortgage, the home purchaser does not pay riba or interest to the Islamic financial institution as he or she does when financing with a conventional home loan. In this manner, in case of a default, a Shariah-complaint mortgage protects the purchaser from paying intensified interest that results in a cost more noteworthy than the first deal cost of the house.

1. Islamic financial institutions keep the whole home financing process Shariah-compliant and, along these lines, won’t compound late installment charges like conventional home loan institutions.
2. Rather, they charge a settled expense that covers the late installment charge cost and does not fill it in as a method of benefit (usually, the amount is given for charity).
3. Conventional mortgage companies regularly charge a pre-installment penalty to purchasers who need to pay in front of the concurred courses of events, while Islamic mortgage providers cannot do this.

Final Words

1. Islamic banks differ from conventional banks in several ways.
2. When applying for a business loan, Islamic banks provide resources for starting your business, not just money.
3. Islamic banking operations are Shariah compliant, so make sure that all the Shariah rules are being followed.
4. There should not be a huge difference in final prices of the asset, when comparing the Islamic Mortgage to a Conventional mortgage.
5. Compliance is ensured when operations are supervised by a recognized Shariah board or scholar.