What is a Halal Mortgage? How does it work?

Federal Government Considers Making Islamic Home Financing More Accessible

A Halal mortgage, also known as Islamic mortgage, is a financial product designed to comply with Islamic law (Shariah) principles, which prohibit the payment or receipt of interest (riba). Instead of charging interest, a Halal mortgage typically involves a form of co-ownership or profit-sharing arrangement between the lender and the borrower.

In a bid to facilitate greater access to housing for Canadians, the federal government is eyeing measures to expand the availability of Islamic home financing. This initiative was highlighted in the recently unveiled 2024 federal budget, indicating Ottawa’s commitment to exploring new avenues, including halal mortgages, within the realm of alternative financing products.

As part of the budgetary process, the government has commenced consultations with financial service providers and various communities to gain insights into how policies can be tailored to better serve the diverse needs of Canadians aspiring for homeownership. The aim is to foster an inclusive housing market that caters to the specific requirements of different segments of the population.

The budget document underscores Canada’s position as a host to a dynamic and burgeoning market of alternative financing products, such as halal mortgages. These products play a pivotal role in facilitating the participation of Muslim Canadians and other diverse communities in the housing market.

Presently, none of the major Canadian banks offer halal mortgages, which adhere to an interest-free payment structure aligned with Islamic principles. However, select lenders in the country have been providing halal mortgage solutions for several years.

Halal mortgages are not products directly offered by the Government of Canada. The government is exploring avenues to assist more Canadians in achieving homeownership while ensuring the implementation of adequate consumer protections.

In March 2024, the government began consulting financial services providers and diverse communities to understand how federal policies can better support the needs of all Canadians seeking to become homeowners. The government will provide an update in the 2024 Fall Economic Statement.

Understanding Halal Mortgages

A halal mortgage represents a real estate financing method that aligns with Islamic principles and teachings. In adherence to Sharia law, which prohibits Muslims from engaging in transactions involving interest (riba), halal mortgages forgo conventional interest-based mechanisms.

According to Manzil, a Canadian financial institution offering Sharia-compliant services, halal mortgages operate on the principle of profit-sharing, rather than interest accrual. Essentially, these mortgages entail a co-ownership arrangement between the lender and the homeowner, with monthly payments comprising both a portion of the principal amount and a fee for the lender’s share of ownership in the property.

The process and documentation involved in halal mortgages differ from traditional mortgages, emphasizing the acquisition of a tangible asset and long-term partnership or resale arrangements.

Types of Halal Mortgages

Halal mortgages in Canada encompass various agreements, including Ijara, Murabaha, and Musharaka. Each agreement entails distinct structures tailored to meet the preferences and needs of homebuyers adhering to Islamic principles.

Ijara: Resembles a rent-to-own agreement, wherein the occupant initially leases the property and eventually transitions to ownership upon fulfilling the final payment.

Murabaha: Operates on a cost-plus financing model, wherein the financial institution purchases the property and sells it to the client at a price inclusive of a profit margin, typically benchmarked against the Bank of Canada’s overnight lending rate.

Musharaka: An arrangement that sees an Islamic financial company and its client become co-owners of a home. Each party is named on the title of the home, though the client lives in it. Throughout the mortgage term (up to 30 years) the financial company’s equity position decreases.

Financial Considerations

Halal mortgages offer the advantage of long-term fixed rates, fostering stability and predictability for homeowners. However, the associated costs may be higher due to limitations on accessing low-cost capital, necessitating further exploration of potential policy changes or regulatory frameworks to enhance affordability and accessibility.

Eligibility and Accessibility

Halal mortgages are available to all Canadians, irrespective of religious affiliation, reflecting a commitment to inclusivity and diversity in the housing market. While certain prerequisites, such as a minimum down payment and creditworthiness, apply, these mortgages aim to cater to a broad spectrum of individuals seeking ethical and Sharia-compliant financing solutions.

In conclusion, the federal government’s exploration of measures to expand access to halal mortgages underscores a commitment to fostering inclusivity and diversity in the Canadian housing market. As discussions progress and policy considerations evolve, the aim is to establish a framework that empowers Canadians from all walks of life to realize their dreams of homeownership in alignment with their values and beliefs.

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