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With today's high rates, should you consider an interest-free halal mortgage?

A halal mortgage complies with the Islamic religious, or Shariah, law, which forbids the use of "riba" (interest). (Mikhail Nilov / Pexels) A halal mortgage complies with the Islamic religious, or Shariah, law, which forbids the use of "riba" (interest). (Mikhail Nilov / Pexels)
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While not yet common in Canada, halal mortgages have been available for those in the country who seek loans that abide by the Islamic law to buy homes.

Halal mortgages have more broadly become a subject of conversation after being recently highlighted in the 2024 spring federal budget.

More offerings for halal mortgages could become available as interest grows and the government looks to expand access for these types of alternative financing products.

"This could include changes in the tax treatment of these products or a new regulatory sandbox for financial service providers, while ensuring adequate consumer protections are in place," the federal government said in the budget document, noting that it will provide an update in the 2024 Fall Economic Statement.

In addition, more Muslims and other potential homeowners are looking at this option amid inflation and as pandemic-era mortgages come up for renewal.

Here's what mortgage experts say those considering "no-interest" halal mortgages should know.

How 'no interest' works

A halal mortgage is very similar to a traditional mortgage with the same process and guidelines, but it has extra steps for the lender. This includes preparing separate documents to ensure they comply with the Islamic religious, or Shariah, law, which forbids the use of "riba" (interest), said Victor Tran, mortgage and real estate expert with Ratesdotca, a Canadian online platform for insurance and mortgage and credit rates.

Halal is Arabic for "lawful" or "allowed."

"The loan that they secure for a home has to be Shariah-compliant, meaning that the loan has to comply with their Islamic law in order for them to be comfortable to secure that type of mortgage," the Toronto-based mortgage broker said in a Zoom interview with CTVNews.ca.

Shoeb Sharieff, president of Islamic finance consultant company Ijara Community Development Corp., said interest is forbidden in Islam because it could exploit the borrower. An Islamic finance transaction protects the rights of all parties and is fair to everyone, he explained. His non-profit company offers halal mortgage services for customers in North America, including Canada.

But Tran said he's not aware of any halal mortgage product without a rate tied to it.

According to Tran's interpretation, although Shariah law forbids interest, halal mortgages are not necessarily interest-free. What is essentially interest can be named differently, such as "profit rate," "profit" or "fee," Tran said.

"So the halal mortgage is basically just like a traditional mortgage without the word 'interest' in any of the documentation, but rather they would incorporate some type of fee structure," he explained. "There's still money for the lenders to make."

Currently, this type of product is offered by non-bank lenders or private institutions, not chartered banks, Tran said.

However, Sharieff said profit is permissible as long as it complies with the Islamic faith.

"No interest doesn't mean no profit," Sharieff said in a video interview from Ann Arbor, Mich. "You can make a profit that's based on some kind of a trade or business transaction, but you're not permitted to profit from the lending of money per se."

Halal mortgages are similar to traditional mortgages when it comes to following lending laws, guidelines and processes, Sharieff said.

"It's not a case of where somebody just went into a traditional contract and just changed the word interest to profit. They're structurally very different."

There are three ways to do Sharia-compliant financing. They're considered more equitable and ethical because they're based on a trade where all parties can share in the gain or loss, he said.

Rent-to-own, or "Ijara wa Iqtina," is the best method economically for halal mortgages or transactions dealing with assets or long-term transactions. With this method, a trust is created so it owns the asset, then a lease-to-own arrangement is made with the customer. Sharieff said it functions more like a regular mortgage but is structurally a rent-on-property transaction, not a rent-on-money transaction.

"So when the customer makes their rent payment, part of their payment goes to ownership until they get to 100 per cent," Sharieff explained. "Now, the math can be the same as a regular mortgage, but the profit is not earned as a rent on money, it's earned as a rent on property. ... So that's very different than just changing the word interest to profit in a regular mortgage."

The second method, "Musharaka," is a joint venture, also known as a declining balance co-partnership, in which the customer becomes partners with the lender. The customer and lender share the gains and losses. Sharieff said it's good for non-asset based transactions such as a business line of credit.

"This has some complications because technically speaking, banks are not supposed to own real estate. So there's a few workarounds that you have to go through in order to make that work."

The third method is an instalment sale, or deferred sale finance called "Murabaha," which occurs when the customer buys the property and marks it up from the initial price and makes payments over a period of time. Sharieff said this is good for short-term deals such as auto finance.

Can anyone apply?

Anyone can apply for a halal mortgage, even if they are not Muslim, but in Tran's opinion, it's not in their interest to do so because it can cost more than a traditional mortgage.

"So mortgage payments per month are going to be higher and overall they end up paying more out of pocket and in total interest, payable to the lender, to secure that type of mortgage," he said. "Anyone that is not a believer of the Islamic faith, they're better off just going for a traditional mortgage."

Are they more or less expensive?

Lenders could charge a higher rate or a higher fee to offer this type of service in part because a halal mortgage is "a very niche product" and not common in Canada, Tran said.

"There's not a lot of competition and not many financial institutions that offer Islamic financing or any Shariah-compliant mortgages."

Depending on the lender or Islamic financial institution and the customer's financial situation, a halal mortgage rate could generally cost about two to three per cent more than a traditional mortgage rate, he said.

"With my experience arranging that type of financing, it was roughly around two per cent more," he said. "And it's interesting because (some of his Muslim clients) don't mind paying that higher amount per month. They don't mind paying that higher rate because it's a product that is Shariah-compliant and it fits within their Islamic law."

Though some for-profit companies may offer halal mortgage rates that cost more, Sharieff said his non-profit charges fees similar to traditional mortgages in part because it works with a traditional bank.

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