How is an Islamic Mortgage Different from a Conventional Mortgage?

What is a Conventional Mortgage?

Before explaining Islamic mortgages, it would be better to go over the basics. What is a conventional mortgage? It is the most common type of loan available almost everywhere in the world, offered by most banks and financial institutions. These establishments and mortgage lenders lend money to their clients to help them buy new homes. Lenders charge a specific interest for that loan. Conventional mortgages consist of a principal amount or the money borrowed and the interest rate. You have to pay off the interest and principal amount within a predetermined amount of time.

What is an Islamic Mortgage?

Coming to Islamic loans, they are generally called Shariah-compliant mortgages. Basically, they are mortgages that comply with the Shariah law. They work in an entirely different way because Islamic financial norms prohibit charging interest. There are several models of a halal mortgage loan, with Murabaha and Ijarah being the two most common ones. The general belief is that an Islamic mortgage is better than its conventional counterpart as there are no interest rates. Also, it compels even non-Muslims to choose Islamic loans in some parts of the world.

Purchasing & Leasing Back

The most significant difference is that the loan is not a debt with an Islamic mortgage. Instead, it is a form of partnership between the lender and the borrower. Both parties share the profits or losses of the property, making it helpful when you purchase a house off-plan, as you do not have to pay anything until the property is ready to be occupied.

No Late Payments or Interest Rates

There is another significant difference between an Islamic mortgage and a conventional loan – there is no interest charged on Islamic loans. There is, instead, a profit rate applied. This rate is calculated based on the value of the property at the time of sale. This is because a loan is supposed to be a helping hand from a person to aid another as a gesture of charity, and the lender can only expect to receive the amount of money they lent out. The bank or the lender purchases the property on your behalf and then resells it to you at a profit. Then, the buyer pays back to the lender in monthly installments.

Shorter Mortgage Terms

Lastly, Islamic mortgages typically have a shorter term than conventional mortgages. Most can be repaid over five to seven years because Sharia law prohibits the lending of money for longer periods.

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Final Words

If you are thinking about taking out a mortgage, it is vital that you compare the different types of mortgages available and pick one that best suits your requirements. Maybe you will find that a halal mortgage loan is the most suitable option. If you do not want to be burdened by the interest and can afford to pay back the mortgage amount within seven years, an Islamic mortgage is perfect.