Interest-free, but not without charges: Islamic mortgages hit the Canadian housing market | 24CA News

For Abdullah Mohiuddin, entering into the housing market includes extra than simply finding the appropriate residence for the appropriate value.

Like many different Muslims, Mohiuddin’s spiritual beliefs embody restrictions on paying and receiving curiosity. Given {that a} typical Canadian mortgage contains curiosity fees, this has added an extra problem to his quest to cease renting and transfer right into a home he owns.

“Even if the interest is very low, even if the interest rate is like 0.1 per cent, if it’s more than zero per cent, then we cannot deal with conventional banks,” mentioned Mohiuddin.

While he has been looking for months, new choices have begun to emerge within the Canadian mortgage market that might swimsuit Mohiuddin’s wants.

Several firms in numerous Canadian provinces are slowly starting to supply Islamic, or “halal” mortgages. Halal is an Arabic time period that interprets to “permitted” or “allowed” in English. These mortgages are intentionally structured to stick to each Canadian legislation and the assumption methods of many Muslims.

No curiosity, however you continue to pay

Financial merchandise that keep away from “riba,” or curiosity, are usually not freed from cost simply because they’re freed from finance fees.

Muslims in search of a halal mortgage are nonetheless going to be paying carrying prices to a monetary establishment for a mortgage to buy their residence.

“When people in Canada, in the United States heard that Islamic finance forbids interest, we in the West automatically assumed that money was for free,” defined Walid Hejazi, affiliate professor of financial evaluation and coverage on the University of Toronto’s Rotman School of Management.

That is just not the case, says Hejazi, whose analysis has targeted on Islamic finance merchandise.

“People that get Islamic mortgages still pay a comparable amount that you would pay if you got a conventional mortgage. It’s just that the structure of these mortgages are different,” he mentioned.

According to halal mortgage suppliers, structural variations can embody the supply of the loaned cash, in addition to authorized variations. Some mortgages extra carefully resemble a “rent-to-own” system, the place the mortgage supplier can be an proprietor of the house. There are additionally authorized buildings the place charges are charged as a substitute of ordinary curiosity funds.

Even although halal mortgages nonetheless find yourself costing cash identical to a traditional mortgage, the best way these fees are structured makes a giant distinction, in keeping with consultants comparable to Hejazi.

“Many people will look at Islamic finance and say, instead of paying interest, you’re paying profits, so really it’s the same thing. And I think that’s disingenuous. …  How you get to the outcome really matters, and there’s many, many religions where this is the case,” he mentioned.

Harder to supply cash — in order that they’re usually dearer

Companies comparable to Oakville, Ont.-based Eqraz are simply starting to supply halal mortgages. Founder Zuhair Naqvi mentioned with nearly no advertising, his firm is already seeing excessive demand.

Naqvi immigrated to Canada from Qatar in 2020, however had been engaged on launching Islamic financing in Canada for years earlier than that.

“Canada is about 20 years behind on Islamic finance compared to other developed countries like the U.S. and U.K.,” mentioned Naqvi.

As the marketplace for Islamic finance is much less developed in Canada, Naqvi mentioned, discovering halal and religiously acceptable sources of funding to lend out for mortgages has been tough. This can imply prices are greater as funds are extra scarce.

On prime of this, there are extra administrative prices that should be unfold throughout a smaller shopper base.

“We have to add a 1.5 per cent margin to cover our costs, so effectively, that makes our mortgage about four per cent more expensive than the RBC or Scotiabank five-year mortgage, as an example,” he mentioned.

Higher threat for now, however that might change

The Edmonton-based Canadian Halal Financial Corporation can be providing halal mortgages. Co-founder Thomas Lukaszuk identified that the chance will be greater to lenders.

According to Lukaszuk, his firm can not foreclose on a house because of Islamic restrictions. This can imply greater fees to mitigate that monetary probability.

“The risk is higher, hence the cost is higher … and we’re also dealing with a much smaller critical mass,” mentioned Lukaszuk.

That crucial mass of shoppers is smaller but it surely’s not unsubstantial.

According to Statistics Canada, out of greater than 1.7 million Muslims, greater than 800,000 dwell in a “tenant-occupied dwelling” quite than proudly owning the house they dwell in.

For firms like Canadian Halal Financial Corporation or Eqraz, that represents a large goal market.

Naqvi believes prices will go down because the business of halal mortgages grows, as a result of to him, a bigger pool of shoppers means a decrease threat of default for lenders.

“With time, the bank and whoever funds Eqraz, or other Islamic companies, they will realize that the risk is not as high as they are calculating it to be, and the cost of the funding will therefore go down,” mentioned Naqvi.

Established buildings are nonetheless tough to get by way of

Both Lukaszuk and Naqvi identified challenges round regulation and insurance coverage in Canada.

Many mortgage insurance coverage suppliers don’t insure Islamic mortgages as a rule, as a result of the authorized buildings will be completely different relying on the supplier.

While a 2010 report for the Canada Mortgage and Housing Corporation mentioned Islamic monetary merchandise mustn’t “present any particular difficulties” underneath Canadian accounting requirements, years later they’re nonetheless removed from widespread and there are authorized points that come into play comparable to who’s registered on land titles, and whether or not a rent-to-own contract is topic to landlord and tenant laws in numerous provinces.

“Another big challenge within Canada is the regulatory environment makes it more difficult to issue an Islamic mortgage relative to a conventional mortgage,” confirmed Hejazi.

Breaking into Canada’s monetary circles offered one more problem for Naqvi. 

“It was a people challenge as an outsider, as a new entrant to Canada, as a Muslim, to break into the circles of Bay Street in Toronto,” defined Naqvi. 

“It took me more than two years to get the trust and acceptance of the people that are there,” he mentioned.

The Islamic mortgage market is developed sufficient, nonetheless, for Mohiuddin to organize to enter the market himself. With a number of Islamic mortgage suppliers throughout the nation, he is extra comfy financing a house.

“I think I’m already looking at the houses in the market and if there is an opportunity, I think I will be putting out offers in a month or so,” mentioned Mohiuddin.