How Does Islamic Home Loan Work?

Shakira
Post : May 2, 2023

Borrowing money to purchase a home is an area of personal finance that affects Muslims. As Islam does not allow charging interest, traditional home loans are not suitable for all those living by Islamic principles. 

Since Islam forbids loans that bear interest, Muslims seek halal alternatives to purchase properties. While there might have not been many halal Islamic home loan options many years back, there are a range of options available now. 

Islamic home loan is a halal, free-of-riba method of providing home loans for Muslims as well as Non-Muslims to buy a home. They allow buyers to get on the property ladder through methods that are sharia compliant.

Everything you need to know about Islamic home loans Australia and how they work is provided in this guide. Keep reading to learn more. 

Islam and personal finance

Islam has guided Muslims in every aspect of life, this includes the financial activities too. The laws of Islam do not allow Muslims to pay or receive interest, due to this Muslims are restricted from involving in conventional banking systems. 

Islamic principles furthermore restrict Muslims from investing in certain sectors. This means Muslims are prohibited from investing in alcohol, tobacco, gambling and financial services that lend interest or firms that invest in services that are not Sharia compliant. Prohibitions also apply to financial products such as derivatives that can lose or gain substantial value.

How does Islamic home loan work? 

Islamic home loans are mortgage alternatives that are Shariah compliant and function as home purchase plans with no interest. There are several variations but all work in the same general way. 

The bank becomes the legal owner as it buys the property on your behalf. The payments you make monthly would function as rent. A part of it goes towards buying out the stake of the property owner. When the term ends you should have either bought back the property or have an outstanding sum left that needs to be settled before you can become the legal owner. 

Types of Sharia mortgage

There are three types of Sharia mortgage alternatives. They are:

  • Ijara
  • Diminishing Musharaka 
  • Murabaha

Ijara

An Ijara home purchase plan is one in which monthly payments are made to finance your purchase which is part rent and part capital. This means throughout the term, your ownership share of the property would remain consistent. 

Diminishing Musharaka 

Diminishing Musharaka is a joint agreement between you and the Islamic home loan provider. In this type of agreement, you pay off the provider's share in monthly instalments. By doing so their ownership share shrinks while your share grows. 

Murabaha

Under the Murabaha purchase plan, the Islamic home loan provider will buy the property and then sell it to you at a marked-up price, which you would pay in monthly instalments with no interest. 

What are the essential features of an Islamic home loan and what makes it halal?

For a Sharia-compliant loan, the following requirements must be met:

  • Money used for the funding of loans must be acquired through ethical Islamic investment funds.
  • All transactions between the financier and the customer must be conducted in a just and fair manner. 
  • A unique contract comprising requirements under Australia's National Credit Code and Islamic Ijara must be conducted for lending. 
  • Loans should only be given to borrowers who engage in Sharia-compliant activities. 

All these types of Islamic home loan alternatives are only slightly different from each other but need to be considered with care to choose the right home loan option for you and to avoid potential risks. 

Purchase a home

Afiyah financial services were established to make it easy for all Muslims as well as Non-Muslims in Australia to purchase a house without getting involved in interest-based loans. 

We know purchasing a home is an exciting experience and we want to make it even better for you with our services as our contracts are totally interest-free.

For Islamic home loan Australia consider Afiyah financial services where you don't have to compromise your religious practices just to purchase your dream home.  

Conclusion

All those who are looking to purchase their dream home can now easily apply for an Islamic home loan at Afiyah financial services.

At Afiyah we provide various Islamic home loan opportunities that are free of riba and totally Sharia compliant. 

Contact us today for the best Islamic home loan in Australia and get on your property ladder with us. 

 

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