What is a ‘halal mortgage’? Does it make housing more accessible?

The 2024 federal price range introduced on April 16 included plans to introduce “halal mortgages” as a solution to improve entry to dwelling possession.

But what’s a halal mortgage? Is it going to extend entry to dwelling possession?

What is a halal mortgage?

Dr. Abdul Aleem, educating professor on the University of Alberta’s Economic Department says a Halal mortgage is a “permissible” different for normal mortgage. He says curiosity is forbidden in accordance with Islamic Sharia, which is the Islamic regulation.

“(It) provides a permissible alternative to interest-based mortgages by allowing the Muslims to purchase their own home without having to pay interest, because Islam strictly prohibits it,” Dr. Aleem stated.

Dr. Aleem says everyone seems to be eligible to use for a halal mortgage, citing it’s not discriminatory.

In Canada, there are two firms offering this sort of mortgage: Manzil and Eqraz, Dr. Aleem says, noting that they’re members of a world group referred to as the Accounting and Auditing Organization for Islamic Financial Institutions.

If permitted, all Ontarians, no matter religion, would have entry to halal monetary merchandise via the province’s monetary establishments.

How does it work?

Dr. Mohamad Sawwaf — co-founder and CEO of Manzil — says although halal mortgages keep away from curiosity, they don’t seem to be freed from cost.

He says that there are three main sorts of Islamic dwelling finance fashions used for dwelling financing by Islamic banks and different monetary establishments within the west, together with the Murabaha, Ijarah, and Musharaka fashions.

He notes that these fashions carefully resemble rent-to-own or shared fairness agreements.

Murabaha: The lender buys and resells the property to the house purchaser at a marked-up worth, which incorporates an agreed revenue margin for the financial institution. The lender will pay this quantity in installments or a lump sum, as per the settlement, explains Dr. Sawwaf.

Musharakah: This is a co-ownership between the house purchaser and the lender or financing firm, the place each events comply with put money into a property and buy the house collectively as companions.

“Each party owns shares in the home based on the percent of the purchase price they contributed. For example, if the home is priced at $100,000 and the customer pays a down payment of 10 per cent (or $10,000) and Manzil contributes 90 per cent (or $90,000), the customer is 10 per cent owner and Manzil is 90 per cent owner,” Dr. Sawwaf defined.

“In a version called Diminishing Musharakah, or the Declining Balance Method, the home buyer gradually buys out the financier’s stake in the property, while paying a fee to use the part of the property still owned by the financier.”

Currently, halal mortgages are facilitated in both Murabaha or Musharaka, because the third mannequin – Ijarah comes with some issues, he explains.

“Ijarah is an Islamic financing structure where the bank buys a property on behalf of a customer and leases out the home to them for a fixed rent. The home buyer will then pay monthly payments that include a portion that goes toward purchasing the home. This concept is akin to a rental or leasing agreement, in which the lessee benefits from the asset, and the lessor earns a fixed income from the rent,” he stated.

“Ijarah is compliant with Sharia law, which prohibits charging interest and ensures that all financial transactions are backed by tangible assets and involve shared business risk. Like Murabaha, however, it has a major drawback in that the home buyer does not gain full ownership rights until the end of the sales contract term, typically 25 years.”

What is the speed of a halal mortgage?

Sawwaf says Manzil’s present qualifying fee is 7.75 per cent for a 5 yr fastened fee mortgage, noting that that is the proportion of revenue the buyers require.

“There is no pricing breakdown as we finance at the rate our investors require it at,” he added.

A minimal of 20 per cent down cost is required to acquire a halal mortgage, Sawwaf says, as “these mortgages will not be CMHC Insurable, (CMHC supplies a full vary of mortgage mortgage insurance coverage,) therefore we aren’t allowed to supply decrease down cost mortgages.”

Canadians can use Manzil’s webpage to calculate their cost or apply right here: https://manzil.io/signup.

Currently, the Bank of Canada’s rate of interest is 5 per cent.

Why are halal mortgages costlier?

Dr. Sawwaf says a halal mortgage is costlier than an everyday mortgage, because the pricing is predicated on the price of capital attracted by the buyers collaborating within the financing program, not primarily based on the Bank of Canada’s in a single day lending fee.

“Banks have a cheaper cost of capital as they are able to take on deposits that require a lower return to be provided. These are two fundamentally different ways to capitalize programs, which is why our program is more expensive than its conventional counterpart,” defined Dr. Sawwaf.

He notes that he is been the lead marketing consultant and advocated to immediate the federal authorities to allow halal mortgages to grow to be extra accessible throughout Canada.

“Amendments to the tax code to ensure that consumers are not paying more in tax when getting involved in these structures, along with allowing banks to fund these structures while maintaining the ability to off-balance sheet them into CMHC’s mortgage pool program, while putting a regulatory framework in place to ensure Canadian consumers are protected from anyone that decides to claim they have a ‘halal mortgage product’ when in fact they do not,” he added.

CTV News Ottawa has reached out to the Minister of Finance’s workplace for feedback, asking how such an avenue would assist Canadian’s entry the housing market.