Achi news desk-
The federal government is looking at making Islamic home financing increasingly accessible to help more Canadians break into the housing market.
As part of the 2024 federal budget released last week, Ottawa said it is “exploring new measures to expand access to alternative financing products, such as halal mortgages.”
Last month, the federal government began consulting with financial service providers and communities to understand how policies can better support the needs of all Canadians seeking homeownership, according to the budget.
“Canada is home to a vibrant and growing market of alternative financing products, including halal mortgages, which enable Muslim Canadians, and other diverse communities, to further participate in the housing market,” the budget says.
Currently, none of Canada’s six major banks offer halal mortgages, which are an interest-free payment structure that follows Islamic principles.
However, some lenders in Canada have been offering halal mortgages for several years now.
“Halal mortgages are already offered to all Canadians by financial institutions,” said Caroline Thériault, spokeswoman for the Department of Finance, in an emailed statement to Global News Tuesday.
Thériault said halal mortgages are not Canadian government products.
“Simply put, the government is looking at ways to help more Canadians become homeowners, while ensuring that adequate consumer protections are in place.”
What is a halal mortgage?
A halal mortgage is a real estate financing method that complies with Islamic principles and teachings.
Under Sharia law, Muslims are prohibited from receiving and paying interest, so a halal mortgage essentially takes interest out of the equation.
Instead, the mortgage is based on the principle of profit, said Mohamad Sawwaf, founder and CEO of Manzil, a Canadian financial institution that offers Sharia-compliant services.
Manzil has been offering halal mortgages based on partnership and profit since 2020.
“We look at this product as an innovation in the Canadian mortgage market to allow for a segment of the population and the wider ethical community that may want to participate,” Sawwaf said in an interview with Global News Monday.
The end result of homeownership is the same, but the process and documentation is different compared to a regular mortgage, he said.
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“Within the principles of Islamic finance, you acquire a real asset, it’s commodity-based, and then you resell it or partner in that asset for the long term, so that’s the difference key here.”
Victor Tran, mortgage and real estate expert at Ratesdot.ca and broker with True North Mortgage, said a halal mortgage is almost like a traditional mortgage where the borrower and homeowner have joint ownership of the property, but there are additional steps involved. at that.
He said the difference is that “rather than charging interest to the homeowner, the contract is structured in a way where a fee is charged.”
Although halal mortgages are interest-free, it does not mean that the lending takes place at a charge of zero percent, said Sawwaf.
“It means you are not involved in a transaction where money is borrowed and you have to pay more money back,” said Sawwaf.
“That is the principle of usury within Islam and other Abrahamic religions that we try to avoid.”
Usury, the lending of money at exorbitant interest rates, is also forbidden in Judaism and Christianity.
Halal mortgages in Canada fall under three different types of agreement, known as Ijara, Murabaha and Musharaka, according to Rates.ca.
Ijara is like a rent-to-own agreement where the resident of the home starts as a renter and becomes the owner upon final loan payment, Tran said.
Under this type of financing, the home is purchased by a trust, which then leases it to the customer.
The Murabaha is a cost-plus financing structure where an Islamic finance company becomes the owner of a home and sells it to their client at a price that includes a profit rate, which is benchmarked against the Bank’s overnight lending rate Canada, Tran explained. .
The client enters into a purchase agreement that specifies fixed monthly payments for the duration of the contract, which is usually up to 15 years.
Under a Musharaka arrangement, an Islamic financial company and its client become joint owners of a home, Tran said.
Throughout the term of the mortgage, which will follow the traditional mortgage term of up to 25 to 30 years, the finance company’s equity position decreases and the customer’s equity position increases proportionately as they pay off the balance is theirs.
At the end of the contract, the client will have 100 percent home ownership and the company will have zero percent, Sawwaf said.
Financial pros and cons of halal mortgages
From a financial perspective, one of the main advantages of halal mortgages is that it delivers a long-term fixed mortgage rate, Sawwaf said.
For example, under a Murabaha agreement, which follows the buy-and-sell structure, the mortgage can run up to 10 to 25 years.
Sawwaf said because the borrower shares the long-term risk, halal mortgages “are much more ethical and valuable at the end of the day” than having a debt-based system “is not very good for society and its life long.” – social impact in the season.”
However, the downside is that the costs of halal mortgages are higher because the borrowers are unable to access low-cost capital, Sawwaf said.
“We hope that the government will signal that they support halal mortgages in relation to legislation or possible policy changes, that this could allow us to take advantage of institutional capital in the banks or other institutions.,” he said.
Tran said because the costs and fees are slightly higher for a halal mortgage than a traditional mortgage, it may not be a viable financial option for many.
Among the measures Ottawa is exploring are changes in the tax treatment of halal mortgages or a new regulatory sandbox for financial service providers.
Who can apply for a halal mortgage?
Anyone in Canada, Muslim or non-Muslim, can apply for a halal mortgage, which is currently offered by some financial institutions.
“Everyone is allowed to have a halal mortgage no different than you can go to any restaurant and eat a shawarma with halal chicken in it,” Sawwaf said.
“We don’t care what your background is, your religion, your belief, even if you are non-religious or an atheist.”
As for the down payment, most lenders in Canada require halal finance clients to pay at least 20 percent of the market value, or purchase price, of the house.
Customers should also have a good credit history and sufficient income to meet the monthly payment obligation, says the Halal Financial Corporation of Canada.
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