Halal mortgages canada are offered a handful of specialized private lenders as well as a credit union subsidiary that offers Shariah-compliant alternatives for traditional finance based on interest. They can be used to avoid the riba (interest) through structures such as Murabaha (cost-plus selling) or Musharaka (co-ownership).
Halal mortgages give Muslim Canadians a faith-compliant path towards homeownership. As Canada’s Muslim population growing from 2.0 percentage from 2001, to 4.9 percent in 2021 and projected to grow to 2.7 million by 2030–the need for Shariah-compliant loans is increasing.
Many Muslim homebuyers are faced with not only the high cost of homes but also the problem of finding financing that is compatible with their beliefs. In 2022, the most recent information available, this gap is evident: Manzil, one of Canada’s only mortgage companies with halal certification has more than 12,000 families on its waiting list which is equivalent to the sum of $6 billion needed for financing.
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How do you define halal mortgage canada?
Halal mortgages are home finance solution that is Shariah-compliant and created to conform to Islamic principles that prohibit the transfer or payment in an interest (riba).
It’s a similar arrangement to a rent-to own agreement. You pay a monthly fixed amount which includes rent and an amount towards ownership. In time, your share of the property will increase until you are fully owned and never pay interest.
Although halal mortgages can come with greater costs and complexity but for a lot of Muslims they provide immense benefits of religious compliance with ethical clarity and increased financial options for a thriving community.
Kinds of Halal Mortgages in Canada
Instead of a traditional loan in which money is lent at a cost Halal mortgages are structured in partnerships or transactions based on assets. The principal models utilized are:
1. Murabaha (Cost-Plus Financing):
A lender purchases the property in full and then sells it to the buyer at a set price (including an income margin). The buyer makes monthly installments that are fixed for a specified period of time.
For instance, if a home is worth $500,000, the lender could sell it to a buyer for $600,000. With the markup of $100,000 being the lender’s profits. The buyer is required to pay amount of $600,000 over equal payments spread over 15 or 20 years.
Important features: Ownership transfer immediately to the buyer and the payments are dependable and guaranteed.
2. Ijara:
The Ijara mortgage is similar to a rent-to-own plan. The lender purchases the property for itself and rents it to you over a predetermined period of time. In this time, you pay regular, steady payments that comprise rent, capital repayment as well as profit to the lender. When the term is over, the agreement, ownership will be transfered to the borrower.
Example: A lender purchases the property that it leases to the buyer at $2000 per month. Of this, $1500 is a rental, while the remaining $500 is used to purchase the property. After a while, the buyer has the property for themselves.
Specific features: The buyer does not have ownership of an asset until the lease period ends The payments are arranged to include rent as well as equity.
3. Musharaka (Diminishing partnership):
The buyer and lender jointly buy the property jointly as co-owners. A buyer lives within the house and pays monthly bills which combine a installment to purchase a larger part of the property as well as an amount to use the remaining portion belonging to the loan provider (rent). In time, the buyers’ equity grows till they have the complete property.
For example, if a house costs $500,000, both the buyer and the lender could both contribute $250,000. The buyer makes monthly installments which include the cost of rent for the lender’s share as well as installments to buy the equity of the lender.
Important features: Ownership is shared at first and the equity of the buyer is increased over time.
These arrangements generate profits to the institution by shares or sales that is permitted under Shariah law, and not by the interest earned on loans.
How do Halal mortgages work?
A) Halal mortgage prepayment privileges
Certain mortgage lenders that are halal provide prepayment plans similar to those offered by mainstream banks. It is possible to prepay 20% of your initial mortgage balance during the course of a calendar year.
Prepayment privileges carry the possibility of penalties for prepayment. Some lenders that are halal will treat over prepayments the same way as Big Six banks do, by charging three months’ profit or using the Profit Rate Differential to determine the penalty.
B) The requirements for qualification for a halal mortgage in Canada
The eligibility requirements for mortgages that are halal in Canada will be determined by the lender. They’ll likely check your credit score, income and earnings and might require an initial down payment of at minimum 20 percent. Halal Financial Corporation, however is a requirement for an initial down payment of 25 percent.
C) The length of the term Halal mortgage
In a halal mortgage term lengths vary between lenders. Some offer terms with shorter durations of one to five years, while others offer terms that span through the entire term of the mortgage, sometimes even 25 years.
Lenders Offering Halal Mortgages
Major Canadian banks are not able to currently offer these services however, a few smaller, specialty institutions offer them.
- Eqraz: offers financing based on Murabaha and is available in all provinces across Canada.
- Canadian Halal Financial Corporation: A firm based in Edmonton that offers the Murabaha in addition to Musharaka models, mostly in Alberta.
- Manzil: Offers the Musharaka (co-ownership) version accessible in major centres within Ontario, Alberta, and British Columbia, with other provinces being developed.
- Servus Halal: A wholly owned subsidiary of Servus Credit Union, offering the Murabaha product for all Albertans under the new provincial law.
Eqraz and Manzil have both joined the members of the Accounting and Auditing Organization for Islamic Financial Institutions. The AAOIFI is a not-for-profit international institution based in Bahrain which regulates Islamic financial institutions and their offerings to ensure they are Shariah compliant.
Canadian Halal Financial Corporation Canadian Halal Financial Corporation is not a part of the AAOIFI however, it adheres to the standards of the organization and has been certified as to be halal by experts from Sharia law.
Key Points:
- Price: Halal loans typically are more expensive than conventional mortgages due the absence of any regulations, a lack of lender access to capital, and greater risk exposure because they are not qualified to be covered by CMHC default insurance.
- Minimum Down Payment: A deposit of 20 percent is usually needed, as these mortgages are categorized as conventional (uninsured) mortgages in accordance with current Canadian rules.
- Government Action Government Action: This year’s 2024 Federal Budget announced that the government is currently consulting with financial institutions on ways to increase the availability of alternative financing options that could lead to more options and lower costs in the future.
Conclusion
Since Sharia law bans riba which is a loan that charges interest conventional mortgages are not permitted for those who are Muslims. To address the financial and spiritual requirements of Muslim buyers, a variety of Canadian lenders offer halal mortgages.
Many Canadians might think of “halal” with food, but it actually refers to Muslim society in general and refers to actions and behaviors like lending that Islam considers acceptable.
Halal mortgages can eliminate the payment of interest using various legal and financial structures. Find out the way they function and where they’re offered in Canada.