Example: Aaban wants to own a home in Australia
Australian resident, Aaban, has decided that he would like to settle down and buy a home in the outskirts of Auburn, Sydney.
As the Islamic religion forbids borrowing money to be repaid with interest, Aaban approaches a local financial institution that provides alternative forms of lending. The lender conducts a preliminary assessment of Aaban's financial situation and issues a conditional letter of approval on behalf of the funder.
The property he'd like to purchase is valued at $310,000 and with his $60,000 deposit, he needs help coming up with the $250,000 difference before the house can be transferred to him.
With the lowest variable rate offered by the lender of 5.2%, he'll have to pay an extra $197,225 on top of the $310 000 principal over 25 years. Aaban enters into a rent-to-buy mortgage agreement and his monthly rental payments are made through direct debit from his nominated bank account.
A representative from the financial institution tells Aaban that as he makes rental payments, the provider's equity in the property will diminish while Aaban's equity will increase so that by the time the debt is extinguished, or if he wishes to sell in the meantime, ownership of the property transfers solely to Aaban.
* This is a fictional, but realistic, example.