Islamic mortgages comply with Islamic law and eliminate interest, allowing devout Muslims to buy homes without compromising their religious values. Different approaches include murabahah, musharaka, and ijarah, and some companies have their products reviewed by Islamic scholars.
An Islamic mortgage is a home loan that complies with Islamic law, allowing devout Muslims to borrow money to buy homes without compromising their religious values. There are various approaches to lending in the Islamic banking industry, and financial companies may also offer their products to non-Muslims. This financing option is available in countries around the world, particularly those with large Muslim populations and home prices too high for buyers to pay cash for cash.
Under Islamic law, the practice of riba, or interest, is prohibited. Islamic law does not prohibit engaging in banking and other financial activities, but it must be done with the intention of benefiting both parties. Legal scholars argue that interest only provides a benefit to the lender, not the borrower, and is therefore prohibited. Islamic mortgages eliminate interest and may be known as la’riba or “interest-free” loans, for this reason.
One approach to an Islamic mortgage is murabahah, an arrangement in which a bank buys a house at full price, determines an appropriate markup, and resells it to the borrower on an installment contract. In this arrangement, both parties benefit as the borrower receives home ownership assistance and the bank makes a reasonable profit on the transaction. The two parties act as partners, while title to the house goes immediately to the borrower.
Musharaka is another option. In this type of transaction, the borrower enters into a transaction with the assistance of an investor who supplies the majority of the purchase price. The two parties are ownership partners and one party pays the other. This arrangement is known as a declining balance co-ownership, where the end goal is for one partner to buy out the other. Investors are usually real estate companies, but families and companies can also offer musharaka loans to other companies and individuals.
The ijarah is another form of Islamic mortgage, where the bank and the buyer enter into a rent-to-own agreement. The bank retains title to the property and the borrower pays the monthly rent until the balance is paid off and she owns the house for free.
Islamic products and mortgages at some companies are reviewed by Islamic scholars and authorities to ensure they comply with the law. The company can provide more information upon request to help borrowers with the process of making an informed decision. In other settings, such companies may offer loans without guarantees that they comply with the law, and borrowers will need to evaluate the terms and conditions of a supposedly Islamic mortgage to determine if it is suitable for their needs.
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