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What is Halal Mortgage ?

May 17, 2024

The 2024 federal budget announced an option to introduce “Halal Mortgages” in Canada as a way to increase access to home ownership.

A Halal mortgage in Canada, often referred to as an Islamic mortgage, is a type of home financing that complies with Islamic law (Sharia). Islamic law prohibits the payment or receipt of interest (riba), which is a fundamental part of conventional mortgages. Instead, Halal mortgages are structured in a way that avoids interest and adheres to Islamic principles.

In Canada, two companies offering this type of mortgage are Manzil and Eqraz, both of which are members of the international Accounting and Auditing Organization for Islamic Financial Institutions.

Here are the common types of Halal mortgages available in Canada:

  1. Murabaha (Cost-Plus Financing): In this arrangement, the financial institution buys the property and then sells it to the customer at a higher price, which includes a profit margin. The customer pays this higher price in installments over an agreed period.
  2. Ijara (Lease to Own): In this model, the financial institution purchases the property and leases it to the customer. A portion of the lease payment goes toward purchasing the property, and over time, the customer eventually owns the property outright.
  3. Musharakah (Partnership/Co-ownership): This model involves a partnership between the financial institution and the customer. Both parties contribute to the purchase of the property and share ownership. The customer gradually buys out the institution’s share over time through additional payments.
  4. Musharakah Mutanaqisah (Diminishing Partnership): This is a variation of the Musharakah model where the financial institution and the customer jointly purchase the property, and the customer gradually buys out the institution’s share. The ownership percentage of the institution diminishes over time as the customer makes payments.

These types of mortgages are designed to ensure that the financing process is in line with Islamic ethical standards, providing an alternative for Muslims who wish to avoid conventional interest-based loans. Several financial institutions and credit unions in Canada offer Halal mortgage products to cater to this need.

Manzil’s current qualifying rate for a five-year fixed-rate mortgage is 7.75 percent, which represents the profit percentage required by the investors and Minimum of 20% Down Payment is required to obtain a Halal Mortgage (Not CMHC Insurable).

A Halal mortgage is typically more expensive than a regular mortgage because its pricing is based on the cost of capital attracted by the investors participating in the financing program, rather than the Bank of Canada’s overnight lending rate.

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