Though it may not be as well-known in the United States, Islamic financing and banking is considered to be one of the most established and well-renowned in the world. Following Shariah laws, which forbid traditional mortgages, Muslims have an alternative for financing the purchase of a home.
It is important to know what an Islamic mortgage is, what it entails, and how customers can borrow the money necessary to finance their home. There are also inherent advantages to Islamic or Halal mortgages, notably below.
What is an Islamic Mortgage?
To discover the benefits of Islamic mortgage options, one must know what an Islamic mortgage is. In Islam, money is thought to have no inherent value. Personal finance and wealth are only permissible through fair trade. Making profit from money goes directly against Shariah Law.
An Islamic mortgage, compliant with Shariah law, isn’t technically a mortgage as much as it is a home purchase plan (HPP). Consider it a lease agreement between the customer and the lender, with no payable interest. The HPP allows customers to purchase their homes while keeping their faith.
A Growing Industry
The Islamic finance industry continues to grow by leaps and bounds. In 2023, Islamic banking’s share of total financing was roughly 45.6 percent. The market is expected to reach $5.9 trillion USD by 2026.
An Islamic mortgage is a fantastic option for buyers looking to adhere to Shariah law while finding a cost-effective means of financing their home. Tremendous growth within the market only stands to create more options for Islamic buyers in the coming years. Not all mortgages are created equally, and Islamic mortgages make it possible for those who aren’t able to take out a conventional mortgage.
Lower Penalty Fees
An Islamic mortgage is generally less expensive in a few ways. One of the primary benefits of an Islamic mortgage is the lower penalty fee for property disposal within the lock-in period. For conventional loans, the penalty fee for an early settlement or prepayment is a set fee.
With an Islamic mortgage, the bank will charge a penalty fee based on the bank’s prevailing cost of funds. That said, the penalty fees can differ between Islamic banks. Check with the lenders you’re considering to understand the details of any penalty fees.
Cost of Stamp Duty
Stamp duty is the land tax that must be paid when buying a property over a particular value. One significant benefit of an Islamic mortgage is that the cost of stamp duty can be as much as 20% lower. Those are no small savings to the buyer.
Islamic financing agreement documents must be filed to gain these benefits. When refinancing from a conventional loan to an Islamic home loan, stamp duty can also be waived for the redeemed amount. That kind of savings isn’t commonly available on conventional loans, another major benefit in addition to adherence to Shariah law.
Base Financing Rate (BFR)
Conventional loans operate under the Base Lending Rate. Islamic loans, however, are based instead on the Base Financing Rate (BFR). The bank can adjust depending on prevailing market conditions but cannot do so more than the ceiling rate.
That ceiling rate is the maximum profit an Islamic finance provider can earn. Compared to conventional home loans, buyers save mightily. Moreover, there is a fixed monthly repayment option so property owners can easily adjust their monthly budget.