What is a 'halal mortgage'? Does it make housing more accessible?

A new home is shown for sale in a housing development in Ottawa on Tuesday, July 14, 2020. THE CANADIAN PRESS/Sean Kilpatrick

The 2024 federal budget announced on April 16 included plans to introduce “halal mortgages” as a way to increase access to home ownership.

But what is a halal mortgage? Is it going to increase access to home ownership?

What is a halal mortgage?

Dr. Abdul Aleem, teaching professor at the University of Alberta’s Economic Department says a Halal mortgage is a “permissible” alternative for regular mortgage. He says interest is forbidden according to Islamic Sharia, which is the Islamic law.

“(It) provides a permissible alternative to interest-based mortgages by allowing the Muslims to purchase their own home without having to pay interest, because Islam strictly prohibits it,” Dr. Aleem said.

Dr. Aleem says everyone is eligible to apply for a halal mortgage, citing it’s not discriminatory.

In Canada, there are two companies providing this type of mortgage: Manzil and Eqraz, Dr. Aleem says, noting that they are members of an international organization called the Accounting and Auditing Organization for Islamic Financial Institutions.

If permitted, all Ontarians, regardless of faith, would have access to halal financial products through the province’s financial institutions.

How does it work?

Dr. Mohamad Sawwaf -- co-founder and CEO of Manzil -- says though halal mortgages avoid interest, they are not free of charge.

He says that there are three major types of Islamic home finance models used for home financing by Islamic banks and other financial institutions in the west, including the Murabaha, Ijarah, and Musharaka models.

He notes that these models closely resemble rent-to-own or shared equity agreements.

Murabaha: The lender buys and resells the property to the home buyer at a marked-up price, which includes an agreed profit margin for the bank. The lender can pay this amount in installments or a lump sum, as per the agreement, explains Dr. Sawwaf.

Musharakah: This is a co-ownership between the home buyer and the lender or financing company, where both parties agree to invest in a property and purchase the home together as partners.

“Each party owns shares in the home based on the percent of the purchase price they contributed. For example, if the home is priced at $100,000 and the customer pays a down payment of 10 per cent (or $10,000) and Manzil contributes 90 per cent (or $90,000), the customer is 10 per cent owner and Manzil is 90 per cent owner,” Dr. Sawwaf explained.

“In a version called Diminishing Musharakah, or the Declining Balance Method, the home buyer gradually buys out the financier’s stake in the property, while paying a fee to use the part of the property still owned by the financier.”

Currently, halal mortgages are facilitated in either Murabaha or Musharaka, as the third model – Ijarah comes with some complications, he explains.

“Ijarah is an Islamic financing structure where the bank buys a property on behalf of a customer and leases out the home to them for a fixed rent. The home buyer will then pay monthly payments that include a portion that goes toward purchasing the home. This concept is akin to a rental or leasing agreement, in which the lessee benefits from the asset, and the lessor earns a fixed income from the rent,” he said.

“Ijarah is compliant with Sharia law, which prohibits charging interest and ensures that all financial transactions are backed by tangible assets and involve shared business risk. Like Murabaha, however, it has a major drawback in that the home buyer does not gain full ownership rights until the end of the sales contract term, typically 25 years.”

What is the rate of a halal mortgage?

Sawwaf says Manzil’s current qualifying rate is 7.75 per cent for a five year fixed rate mortgage, noting that this is the percentage of profit the investors require.

“There is no pricing breakdown as we finance at the rate our investors require it at,” he added.

A minimum of 20 per cent down payment is required to obtain a halal mortgage, Sawwaf says, as “these mortgages are not CMHC Insurable, (CMHC provides a full range of mortgage loan insurance,) hence we are not allowed to provide lower down payment mortgages."

Canadians can use Manzil’s webpage to calculate their payment or apply here: https://manzil.io/signup.

Currently, the Bank of Canada’s interest rate is five per cent.

Why are halal mortgages more expensive?

Dr. Sawwaf says a halal mortgage is more expensive than a regular mortgage, as the pricing is based on the cost of capital attracted by the investors participating in the financing program, not based on the Bank of Canada's overnight lending rate.

“Banks have a cheaper cost of capital as they are able to take on deposits that require a lower return to be provided. These are two fundamentally different ways to capitalize programs, which is why our program is more expensive than its conventional counterpart,” explained Dr. Sawwaf.

He notes that he's been the lead consultant and advocated to prompt the federal government to enable halal mortgages to become more accessible across Canada.

“Amendments to the tax code to ensure that consumers are not paying more in tax when getting involved in these structures, along with allowing banks to fund these structures while maintaining the ability to off-balance sheet them into CMHC's mortgage pool program, while putting a regulatory framework in place to ensure Canadian consumers are protected from anyone that decides to claim they have a 'halal mortgage product' when in fact they do not,” he added.

In a statement to CTV News Ottawa, the Minister of Finance’s office says halal mortgages are not a product offered by the Government of Canada.

"Halal mortgages are already offered to Canadians by financial institutions. They are not Government of Canada products. The government is simply looking at ways to help more Canadians become homeowners, while ensuring adequate consumer protections are in place," deputy spokesperson and manager, Department of Finance Canada, Caroline Thériault said in the statement.

"For more information on this type of financial product, we would recommend reaching out to financial institutions directly."