While not yet common in Canada, halal mortgages have been available for those in the country who seek loans that abide by the Muslim faith to buy homes.
Halal mortgages have more broadly become a subject of conversation after being recently highlighted in the 2024 spring federal budget.
More offerings for halal mortgages could become available as interest grows and the government looks into expanding access for these types of alternative financing products.
“This could include changes in the tax treatment of these products or a new regulatory sandbox for financial service providers, while ensuring adequate consumer protections are in place,” the federal government said in the budget document, noting that it will provide an update in the 2024 Fall Economic Statement.
In addition, more Muslims and other potential homeowners are looking at this option amid inflation and pandemic-era mortgages coming up for renewal.
Here’s what mortgage experts say those considering “no-interest” halal mortgages should know.
How ‘no interest’ works
A halal mortgage is very similar to a traditional mortgage with the same process and guidelines, but it has extra steps for the lender. This includes preparing separate documents to ensure they comply with the Islamic religious, or Shariah, law, which forbids the use of “riba” (interest), said Victor Tran, mortgage and real estate expert with Ratesdotca, a Canadian online platform for insurance and mortgage and credit rates.
There is an Islamic belief that interest exploits the poor while rewarding the rich, explained the Toronto-based mortgage broker. Halal is Arabic for “lawful” or “allowed.”
“The loan that they secure for a home has to be Shariah-compliant, meaning that the loan has to comply with their Islamic law in order for them to be comfortable to secure that type of mortgage,” Tran said in a Zoom interview with CTVNews.ca Thursday.
Instead of charging interest, the profit to lenders comes from the halal mortgage transaction itself, according to Manzil, a company that provides Shariah-compliant investment, finance and mortgage products.
There are a few ways of making this profit, including co-ownership and higher mortgage payments, providers say.
But Tran said he’s not aware of any halal mortgage product without a rate tied to it.
Although Islam forbids interest, halal mortgages are not necessarily interest-free. What is essentially interest can be named differently, such as “profit rate,” “profit” or “fee,” Tran said.
“So the Halal mortgage is basically just like a traditional mortgage without the word ‘interest’ in any of the documentation, but rather they would incorporate some type of fee structure,” he explained. “There’s still money for the lenders to make.”
Currently, this type of product is offered by non-bank lenders or private institutions, not chartered banks, Tran said.
Can anyone apply?
Anyone can apply for a halal mortgage, even if they are not Muslim, but in Tran’s opinion, it’s not in their interest to do so because it can cost more than a traditional mortgage.
“So mortgage payments per month are going to be higher and overall they end up paying more out of pocket and in total interest, payable to the lender, to secure that type of mortgage,” he said. “Anyone that is not a believer of the Islamic faith, they’re better off just going for a traditional mortgage.”
Are they more or less expensive?
Lenders could charge a higher rate or a higher fee to offer this type of service in part because a halal mortgage is “a very niche product” and not common in Canada, Tran said.
“There’s not a lot of competition and not many financial institutions that offer Islamic financing or any Shariah-compliant mortgages.”
Depending on the lender or Islamic financial institution and the customer’s financial situation, a halal mortgage rate could generally cost about two to three per cent more than a traditional mortgage rate, he said.
“With my experience arranging that type of financing, it was roughly around two per cent more,” he said. “And it’s interesting because (some of his Muslim clients) don’t mind paying that higher amount per month. They don’t mind paying that higher rate because it’s a product that is Shariah-compliant and it fits within their Islamic law.”
