The federal government is looking to make Islamic home financing increasingly accessible to help more Canadians enter the housing market.
As part of the 2024 federal budget released last week, Ottawa said it is “exploring new measures to expand access to alternative financial products, such as halal mortgages.”
Last month, the federal government began consulting with financial service providers and communities to understand how policies can better meet the needs of all Canadians seeking homeownership, according to the budget.
“Canada is home to a vibrant and growing market for alternative financial products, including halal mortgages, allowing Muslim Canadians and other diverse communities to further participate in the housing market,” the budget states.
Currently, none of Canada’s big six banks offer halal mortgages, which are an interest-free payment structure that follows Islamic principles.
However, some lenders in Canada have been offering halal mortgages for several years.
“Financial institutions already offer halal mortgages to all Canadians,” Department of Finance spokesperson Caroline Thériault said in a statement emailed to Global News on Tuesday.
Thériault said halal mortgages are not products of the Canadian government.
“The government is simply looking for ways to help more Canadians become homeowners, while ensuring adequate protections are in place for consumers.”
What is a halal mortgage?
A halal mortgage is a method of real estate financing that complies with Islamic principles and teachings.
Under Sharia law, Muslims are prohibited from receiving and paying interest, so a halal mortgage essentially removes interest from the equation.
Instead, the mortgage is based on the principle of profit, said Mohamad Sawwaf, founder and CEO of Manzila Canadian financial institution offering Sharia compliant services.
Manzil has been offering both partnership-based and profit-based halal mortgages since 2020.
“We view this product as an innovation within the Canadian mortgage market to allow a segment of the population and the broader ethical community to want to participate,” Sawwaf said in an interview with Global News on Monday.
The end result of owning a home is the same, but the process and documentation are different compared to a regular mortgage, he said.
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“Within the principles of Islamic finance, you acquire a real asset, it’s commodity-based, and then you resell or associate with that asset for the long term, so that’s the key difference here.”
Victor Tran, mortgage and real estate expert at Ratesdot.ca and broker at True North Mortgage, said a halal mortgage is almost like a traditional mortgage where the lender and the owner share ownership of the property, but there are additional steps involved.
He said the difference is that “instead of charging interest to the homeowner, the contract is structured so that a fee is charged.”
Although halal mortgages are interest-free, that does not mean the loans are made with a zero percent charge, Sawwaf said.
“It just means that you are not part of a transaction where money is lent and you have to pay more money back,” Sawwaf said.
“That is the principle of usury within Islam and other Abrahamic religions that we are trying to avoid.”
Usury, which involves lending money at exorbitant interest rates, is also prohibited in Judaism and Christianity.
Halal mortgages in Canada fall under three different types of agreements, called Ijara, Murabaha and Musharaka. according to Tarifas.ca.
Ijara is like a rent-to-own agreement in which the inhabitant of the house starts as a tenant and becomes the owner upon final payment of the loan, Tran said.
In this type of financing, the home is purchased by a trust, which then rents it to the client.
Murabaha is a cost-plus financing structure in which an Islamic finance company becomes the owner of a house and sells it to its client for a price that includes a profit rate, which is compared to the overnight lending rate. from the Bank of Canada, Tran explained. .
The customer enters into a purchase agreement that specifies fixed monthly payments for the duration of the contract, which is typically up to 15 years.
Under the Musharaka agreement, an Islamic finance company and its client become co-owners of a house, Tran said.
Over the life of the mortgage, which will follow the traditional mortgage term of up to 25 to 30 years, the financial company’s equity position decreases and the client’s equity position increases proportionately as they pay their own balance.
At the end of the contract, the customer will have 100 percent ownership of the home and the company will have zero percent, Sawwaf said.
Financial pros and cons of halal mortgages
Financially, one of the main benefits of halal mortgages is that it introduces a long-term fixed mortgage rate, Sawwaf said.
For example, under the Murabaha agreement, which follows the purchase and sale structure, the mortgage can last between 10 and 25 years.
Sawwaf said that because the lender shares the long-term risk, halal mortgages are “much more ethical and valuable at the end of the day” rather than having a debt-based system that “is not really good for society and its citizens.” long-term benefits. -Long-term social impact.”
However, the downside is that the costs of halal mortgages are higher because lenders cannot access low-cost capital, Sawwaf said.
“We hope that the government will indicate that it supports halal mortgages with respect to possible legislative or policy changes, which could allow us to tap into institutional capital in banks or other institutions.,” he said.
Tran said that because the costs and fees are slightly higher for a halal mortgage than a traditional mortgage, it may not be a financially viable option for many.
Among the measures Ottawa is exploring are changes to the tax treatment of halal mortgages or a new regulatory sandbox for financial services providers.
Who can apply for a halal mortgage?
Anyone in Canada, Muslim or non-Muslim, can apply for a halal mortgage, which is currently offered by some financial institutions.
“Everyone is allowed to have a halal mortgage, just like going to any restaurant and eating a shawarma with halal chicken,” Sawwaf said.
“We don’t care what your origin is, your religion, your creed, even if you are not religious or atheist.”
As for the down payment, most lenders in Canada require halal financing customers to pay a minimum of 20 per cent of the market value, or purchase price, of the home.
Customers must also have good credit history and sufficient income to meet the monthly payment obligation. says the Canadian Halal Finance Corporation.
