It can be tough for Canadians to get a mortgage, with things like credit scores, income stability, debt ratios and down payments to consider before qualifying. However, for many Canadians, there’s another massive hurdle to mortgages and home ownership: Sharia law.
Sharia law is a life methodology used by practicing Muslims. “Sharia” is an Arabic word that translates into “the way” or “the path to water,” and it has a big impact on the conventional mortgage system. That’s because Sharia law prohibits something called “riba,” AKA loans that charge interest.
Last April, during the federal budget announcement, Justin Trudeau’s Canadian government announced it’s exploring new measures to expand financing options for all Canadians. As part of that exploration, they’re looking into something called Halal Mortgages. Dr. Mohamad Sawwaf, the Co-Founder and CEO of Manzil, a Canadian company offering ethical financial products and services, has been lobbying for this inclusion.
“We’re happy they finally put it in the budget,” he tells HGTV Canada. “We’re also working with the Ministry of Finance and the Department of Finance to actually put some sort of framework around these products and how they can be disseminated and become mainstream.”
Have questions? Read on to learn more about Halal Mortgages, sometimes called a Muslim mortgage, and who qualifies for them.
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What Is a Halal Mortgage?
Halal mortgages don’t charge interest, but because they are based on the principle of profit, there are still costs associated with securing one. Due to limited availability and financiers, Halal mortgages currently cost an average of four percent more than a traditional Canadian mortgage.
According to Sawwaf, there are two main types of Halal mortgages currently offered in Canada:
Murabaha
With this type of mortgage, a financier buys the property and sells it to a customer at a higher price point to secure a profit. The profit is calculated based on things like credit history, deposit, property value and repayment. Typically, the purchaser sets up a corporation under this mortgage structure and isn’t listed as an individual property owner. This type of mortgage is also only used for new purchases.
“It’s like a cost-plus or profit-plus and is akin to a long-term, rent-to-own type of mortgage,” Sawwaf says. “The premise is that you don’t actually pay or receive interest. That doesn’t mean you aren’t earning a profit as a financier or institution, but you’re not lending money and then receiving more money back.”
Musharaka
With this mortgage structure, the purchaser and the financier own the property jointly, with the purchaser slowly paying rent or a portion of the property over time until the end of the term when they own the whole property. Payments and terms can be more flexible, says Sawwaf, which makes Musharaka mortgages the more popular choice for Halal mortgages in Canada.
“You can do new purchases, you can do transfers and refinances,” he explains. “You can also do shorter terms, like a one-year, five-year or 10-year term. With Murabaha, the payments have to be fixed to the term itself, and it’s non-renewable.”
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Who Qualifies for a Halal Mortgage?
Anyone can qualify for a Halal mortgage, and with the proper government support, Sawwaf says they can be a viable alternative for some home buyers in Canada who don’t want a traditional mortgage. He says that in the UK, where Islamic banks offer these products, they service upwards of 40 per cent of non-Muslim clientele.
“It has nothing to do with religion; it’s just a better product and better pricing. There are ethical standards around it,” he adds.
What Are Some Current Challenges With Halal Mortgages?
Currently, none of the Halal mortgage structures in Canada qualify for any of the tax benefits other Canadian home buyers may be eligible for, like the first-time home buyer incentive or the tax-free first home savings account. These mortgages can also be hard to secure since the Canada Mortgage and Housing Corporation (CMHC) doesn’t securitize Halal mortgages. As a result, none of the major Canadian banks currently offer Halal mortgages, and purchasers must go through smaller financial providers to get one.
“If we can get CMHC to accept Halal mortgages as part of their program, then I think we’d be able to see a more mainstream program in place across Canada for everyone to use,” says Sawwaf.
He adds that his company funds about 100 to 200 Halal mortgages annually, translating into about $50 to $100 million per year. The company also has a waitlist of about 16,000 families across Canada, which equates to about $8 billion.
“That’s with zero marketing on our end,” he adds. “We know the demand is there; it’s just finding the mechanism to scale our operations effectively.”
