For some people, the dream of home ownership is far more complicated due to religious beliefs. In a recent email dialogue I had with a gentleman about this topic, I learned something new and rather interesting that I wanted to share with you.
Many Muslims who are true to the teachings of their faith, give up on the idea of owning a home and instead, chose to rent for the long term. Under Islamic law, the basic belief is that interest-based transactions, such as traditional mortgages, are inherently unfair because the basic principle of Islamic banking is the sharing of risk, with shared responsibility for profit and loss. More appropriately referred to as Sharia complaint financing, Sharia law prohibits the fixed or floating payment or acceptance of specific interest or fees for loans of money. In other words, buying a home with a conventional mortgage is not possible.
There are some alternatives with some banks offering Islamic approved financing although they are hard to source. A quick search in the Internet revealed some mortgage brokers specializing in these areas but I think it can be very costly. Some descriptions I found of two alternatives include:
Murabahah: In this type of transaction, the bank purchases the property and then re-sells it to the buyer at a fixed profit. The property is registered in the buyer’s name from the beginning, and the buyer makes installment payments to the bank. All costs are fixed at the time of the contract, with the agreement of both parties, so no late payment penalties are permitted. Banks usually ask for strict collateral or a high down payment in order to protect against default.
Ijarah: This type of transaction is similar to real estate leasing or rent-to-own contracts. The bank purchases the property and retains ownership, while the buyer makes installment payments. When payments are complete, the buyer gains 100% ownership of the property.
This topic really has made me think about the cultural divide that still exists in Canada and the great big hurdles that exist for some. My guess is that eventually new forms of financing will appear that meet the need of Muslim home buyers as supply will somehow always satisfy demand. In the meantime, I feel sad for the gentleman I corresponded with as he continues to have to live in complicated rental situations with his young family.