The 2024 federal budget announced on April 16 included plans to introduce “halal mortgages” as a way to increase access to home ownership.
But what is a halal mortgage? Will access to homeownership increase?
What is a halal mortgage?
Dr. Abdul Aleem, a professor in the Department of Economics at the University of Alberta, says a Halal mortgage is a “permissible” alternative to the regular mortgage. He says interest is prohibited under Islamic Sharia, which is Islamic law.
“(It offers) a permissible alternative to interest-based mortgages by allowing Muslims to buy their own home without having to pay interest, because Islam strictly prohibits it,” Dr Aleem said.
Dr Aleem says everyone is eligible to apply for a halal mortgage, and claims it is non-discriminatory.
In Canada, there are two companies that offer these types of mortgages: Manzil and Eqraz, says Dr. Aleem, noting that they are members of an international organization called the Accounting and Auditing Organization for Islamic Financial Institutions.
If permitted, all Ontarians, regardless of faith, would have access to halal financial products through the province’s financial institutions.
How does it work?
Dr Mohamad Sawwaf, co-founder and CEO of Manzil, says that although halal mortgages avoid interest, they are not free.
It says there are three main types of Islamic housing financing models used for housing financing by Islamic banks and other financial institutions in the West, including the Murabaha, Ijarah and Musharaka models.
He notes that these models are very similar to rent-to-own or shared equity agreements.
Murabaha: The lender buys and resells the property to the home buyer at a high price, which includes an agreed-upon profit margin for the bank. The lender can pay this amount in installments or in a lump sum, depending on the agreement, explains Dr. Sawwaf.
Musharaka: This is a co-ownership between the home buyer and the lender or finance company, where both parties agree to invest in a property and purchase the home together as partners.
“Each party owns shares of the home based on the percentage of the purchase price they contributed. For example, if the house is priced at $100,000 and the client pays 10 percent down (or $10,000) and Manzil contributes 90 percent (or $90,000), the client owns 10 percent and Manzil owns 90 percent owner. ”explained Dr. Sawwaf.
“In a version called Diminishing Musharakah, or Declining Balance Method, the home buyer gradually buys out the financier’s interest in the property, while paying a fee to use the portion of the property still owned by the financier.”
Currently, halal mortgages are facilitated in Murabaha or Musharaka, as the third model, Ijarah, has some complications, he explains.
“Ijarah is an Islamic financing structure in which the bank purchases a property on behalf of a client and rents it to them for a fixed rent. The home buyer will then pay monthly payments that include a portion that goes toward the purchase of the home. “This concept is similar to a rental or lease agreement, where the lessee benefits from the asset and the lessor earns a fixed income from the rental,” he said.
“Ijarah complies with Sharia law, which prohibits charging interest and ensures that all financial transactions are backed by tangible assets and involve shared commercial risks. However, like Murabaha, it has the major drawback that the home buyer does not obtain full ownership rights until the end of the term of the sales contract, usually 25 years.”
What is the rate of a halal mortgage?
Sawwaf says Manzil’s current qualifying rate is 7.75 percent for a five-year fixed-rate mortgage, noting that this is the profit percentage investors require.
“There is no price breakdown, as we finance at the rate our investors demand,” he added.
A minimum down payment of 20 percent is required to get a halal mortgage, Sawwaf says, as “these mortgages are not insurable by CMHC (CMHC offers a full range of home loan insurance), so we cannot offer a down payment lowest initial. mortgages.”
Canadians can use the Manzil website to calculate their payment or request it here: https://manzil.io/signup.
Currently, the Bank of Canada’s interest rate is five per cent.
Why are halal mortgages more expensive?
Dr Sawwaf says a halal mortgage is more expensive than a regular mortgage as the price is based on the cost of capital attracted by investors participating in the financing programme, not the overnight lending rate of the Bank of Canada.
“Banks have a cheaper cost of capital as they can accept deposits that require a lower return. These are two fundamentally different ways of capitalizing the programs, which is why our program is more expensive than its conventional counterpart,” Dr. Sawwaf explained.
He notes that he has been the lead consultant and advocate for prompting the federal government to allow halal mortgages to be more accessible across Canada.
“Amendments to the tax code to ensure that consumers do not pay more taxes by engaging in these structures, as well as allowing banks to fund these structures while maintaining the ability to include them off-balance sheet in CMHC’s mortgage fund program, while also “There is a regulatory framework in place to ensure that Canadian consumers are protected from anyone who decides to claim to have a ‘halal mortgage product’ when in fact they do not,” he added.
CTV News Ottawa has contacted the Finance Minister’s office for comment and to ask how such an avenue would help Canadians access the housing market.