What is a halal mortgage? How interest-free home financing works in Canada

The federal government is looking at making Islamic home financing increasingly accessible to help more Canadians break into the housing market.

As part of the 2024 federal budget that was released last week, Ottawa said it is “exploring new measures to expand access to alternative financing products, like halal mortgages.”

Last month, the federal government started consulting financial services providers and communities to understand how policies can better support the needs of all Canadians seeking home ownership, according to the budget.

“Canada is home to a vibrant and growing market of alternative financing products, including halal mortgages, that enable 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 now.

“Halal mortgages are already offered to all Canadians by financial institutions,” Caroline Thériault, a spokesperson for the Department of Finance, said in an emailed statement to Global News Tuesday.

Thériault said halal mortgages 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.”

A halal mortgage is a real estate financing method that complies with Islamic principles and teachings.

Under Sharia law, it is forbidden for Muslims to receive and pay interest, so a halal mortgage essentially takes interest out of the equation.

Instead, the mortgage is based on the principle of profit, said Mohamad Sawwaf, founder and CEO of Manzil, a Canadian financial institution that offers Sharia-compliant services.

Manzil has been offering halal mortgages that are both partnership- and profit-based since 2020.

“We look at this product as an innovation within the Canadian mortgage marketplace to allow for a segment of the population and the broader ethical community that may want to participate,” Sawwaf said in an interview with Global News Monday.

The end result of homeownership is the same, but the process and documentation are different compared with a regular mortgage, he said.

“Within the Islamic finance principles, you’re acquiring a real asset, it’s commodity-based, and then you are reselling it or partnering in that asset long-term, so that is the key difference here.”

Victor Tran, a mortgage and real estate expert at Ratesdot.ca and broker with True North Mortgage, said a halal mortgage is almost like a traditional mortgage where the lender and the homeowner have shared ownership of the property, but there are extra steps involved.

He said the difference is that “instead of charging interest to the homeowner, the contract is structured in a way where there’s a fee charged.”

Even though halal mortgages are interest-free, it doesn’t mean the lending happens at a zero per cent charge, Sawwaf said.

“It just means that you’re not part of a transaction where money is being lent and you have to pay more money back,” Sawwaf said.

“That is the principle of usury within Islam and other Abrahamic faiths that we’re trying to avoid.”

Usury, which is the lending of 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 Rates.ca.

Ijara is like a rent-to-own agreement in which the inhabitant of the home starts as a renter and becomes the owner upon final loan payment, Tran said.

Under this type of financing, the home is purchased by a trust, which then leases it to the customer.

The Murabaha is a cost-plus financing structure in which an Islamic financial company becomes the owner of a home and sells it to their client for a price that includes a profit rate, which is benchmarked against the Bank of Canada’s overnight lending rate, Tran explained.

The client enters into a purchase agreement that specifies fixed monthly payments for the duration of the contract, which is usually up to 15 years.

Under the Musharaka arrangement, an Islamic financial company and its client become co-owners of a home, Tran said.

Throughout the mortgage term, which will follow the traditional mortgage term of up to 25 to 30 years, the financial company’s equity position decreases and the customer’s equity position increases proportionately as they pay out the owned balance.

At the end of the contract, the client will have 100 per cent home ownership and the company will have zero per cent, Sawwaf said.

From the financial standpoint, one of the main benefits of halal mortgages is that it introduces a long-term fixed mortgage rate, Sawwaf said.

For instance, under the Murabaha agreement, which follows the buy-and-sell structure, the mortgage can run up to 10 to 25 years.

Sawwaf said because the lender is sharing in the long-term risk, halal mortgages are “much more ethical and valuable at the end of the day” as opposed to having a debt-based system that is “not really good for society and its long-term social impact.”

However, the downside is that the costs of halal mortgages are higher because the lenders are not able to access low-cost capital, Sawwaf said.

“We’re hoping that the government signalling that they’re in support of halal mortgages with respect to potential legislation or policy changes, this could allow us to tap into institutional capital at the banks or other institutions,” he said.

Tran said because the costs and fees are a little bit higher for a halal mortgage than a traditional mortgage, it may not be a financially feasible option for many.

Among the measures that Ottawa is exploring are changes in the tax treatment of halal mortgages or a new regulatory sandbox for financial service providers.

Anyone in Canada, Muslim or non-Muslim, can apply for a halal mortgage, which is currently offered by a few financial institutions.

“Everyone is allowed to have a halal mortgage no different than you can go to any restaurant and eat a shawarma with halal chicken in it,” Sawwaf said.

“We don’t care what your background is, your religion, your creed, even if you’re non-religious or an atheist.”

As for the down payment, most lenders in Canada require clients of halal financing to pay a minimum of 20 per cent of the market value, or purchase price, of the house.

Customers should also have a good credit history and sufficient income to meet the monthly payment obligation, the Canadian Halal Financial Corporation says.