Islam prohibits interest from being charged. As a solution to that, Islamic home loans enable you to finance your property purchase with a different financial product that doesn't accrue interest in quite the same way. However, Australia's credit laws still apply and the lender will still charge you for borrowing money.

Islamic home loans are available for many purposes such as construction and purchasing vacant land, although they are not typically used for refinancing. They also come in full and low documentation versions, depending on your leasing needs.

How does an Islamic home loan work?

There are a couple of different methods to take out an Islamic home loan.

Ijarah Muntahiyah Bittamlik (or simply Ijarah or "lease")

This is the most common form of Islamic home finance in Australia. This is where you choose the home and then the financial institution buys it from the seller. You then lease the home for a pre-determined period, in time buying the financier's share of the property.

At the time of the final lease payment, ownership of the home will be transferred to you in the form of a promissory gift or hiba.

Murabaha (or "sale with profit")

Here, you would borrow the value of the property from the financial institution and agree upon a "profit" which you pay in place of interest. Like Ijarah, the buyer becomes the owner once the full agreed-upon amount is paid.

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How does a traditional home loan differ from an Islamic home loan?

With a traditional home loan, a property is purchased through a mortgage agreement and is financed through borrowed funds from the lender. The borrower is required to repay this loan amount plus interest via a predetermined repayment schedule.

The bank has security over the property which means that if the borrower defaults on their home loan, the lender can enforce a sale of the property to recover the outstanding funds owed.

On the other hand, Islamic home finance does not see the buyer borrow money. It looks to the Islamic principles of Ijarah (lease) or Murabaha (sale with profit) where the financial institution enters into a virtual rent-to-buy arrangement with the buyer over a specified time.

Every rental payment the customer makes increases their equity in the property and subsequently decreases the provider's equity. Once the customer has fully repaid the amount, there's no actual transfer of title involved and this addresses stamp duty and capital gains tax implications.

The fundamental difference between a typical home loan and a Sharia-compliant home loan is in the borrowing terms used, such as interest with a typical home loan vs rental or profit fee with an Islamic home loan.

How do I qualify for an Islamic home loan?

Anyone who is eligible for a traditional home loan can usually qualify for Islamic home finance.

Typically, Islamic home finance is offered as a full-documentation product. This means you'll need to provide complete evidence for your savings history and employment history as well as any information related to other assets or liabilities.

The provider will determine your ability to make the payments based on the information you provide.

The documents needed may vary between organisations, but in general you will need the following:

• Proof of identity such as a passport, driver's licence and/or birth certificate.
• Proof of income such as recent payslips, tax returns, accountant's letter or Centrelink statements.
• Proof of existing finance arrangements.

Which core Sharia principles come into play?

Islamic finance is underpinned by Sharia values that are consistent with Islamic legislation. The fundamental principles concerned with Islamic home loans are outlined below.

• Ribā (prohibition of paying and receiving interest): Interest cannot be charged or paid in any financial transaction under Islamic law.
• Gharār (prohibition of uncertainty): While ambiguity is forbidden, risk-taking is permitted when the leasing agreement terms are clearly laid out between all parties involved.
• Profit- and loss-sharing: Under Islamic law, all parties must share the risks and rewards associated with the financial transaction.
• Musharakah (profit- and loss-sharing partnership): Under this contract, a partnership is established in which the parties agree to contribute to the capital of the partnership and agree to share the associated profit or loss.
• Musharakah Mutanaqisah (diminishing partnership): This is a musharakah contract in which one of the parties agrees to purchase the equity share of the other party in the form of rental instalments until the title of equity is transferred to the buyer in full.

What place do Sharia-compliant home loans have in the Australian market?

The proportion of the Australian population who are Muslim has almost doubled in the last few years. The latest census figures show that 3.2% of the population are affiliated with Islam.

According to the State of the Global Islamic Economy 2020/2021 report, the Islam finance market could be worth $250 billion in Australia due to the size of Australia's financial industry and the growing Muslim population. The 2 biggest opportunities the report mentioned was mortgages and superannuation.

A number of Australian financial institutions have examined Muslim financing concepts such as profit sharing and rent-to-buy while trying to avoid terms such as "interest" in contractual agreements.

How to compare Islamic home loans

In many ways you should compare Islamic home loans in much the same way you compare a traditional home loan. But instead of looking out for interest rates, there are other things to consider.

• Method. Check whether a provider offering Ijarah or Murabaha is right for you.
• Service. Make sure the provider complies with the National Consumer Credit Protection Act (NCCP) and works to protect home buyers.
• Costs. Although there is no interest charged, there are often other fees associated such as monthly fees and the agreed-upon profit.
• Early payoff. Find out if you can make extra repayments to pay off the home early. Beware of early repayment costs.
• Loan to value ratio (LVR). The higher the deposit you have, the less you need to pay off over time and the faster you will fully own the home.
• Payments. Check that the payment frequency works for you and that you can meet the payment costs.
• Other features. Take a look at the features that come with the arrangement, such as an offset account.

Things you should consider about an Islamic home loan

Are Islamic products actually interest-free?

Because of Australia's strict credit laws, every credit provider will charge you in some way for borrowing money.

So although you're not paying interest on an Islamic finance product, you would be expected to pay other fees instead.

This can work because the money being paid is for a specific purpose. According to Sharia law, money should not hold value and should not accrue interest. Instead, money is simply something to be traded for goods and services.

Rent for the property is calculated as a percentage of the original purchase price. This percentage is determined based on the lender's cost of funds, fair market rents and operating and management costs. Because the lender is assuming some of the risks by legally owning a large portion of the property, this percentage can often be higher than current traditional home loan interest rates.

Are there any Islamic banking institutions in Australia?

While there are several foreign banks in Australia, few of them offer Islamic home loans. The last few years have seen some providers cease service as well.

Currently, the main Australian financial institutions offering Sharia-compliant products or assistance are Ijarah Finance, Hejaz Financial Services, Amanah Islamic Finance, MCCA Islamic Finance and Investments and Islamic Cooperative Finance Australia Limited (ICFAL).

Australia's first Islamic bank, Islamic Bank Australia, has received its restricted banking licence. Once it gains its full licence in 2024, it plans to begin offering solutions like Sharia-compliant home finance.

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_{Please note that the home loan offers listed below are general sitewide offers. These lenders currently do not offer Islamic home loans.}

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Name	Interest Rate p.a.	Comparison Rate p.a.	Fees	Monthly Payment
Unloan Variable Home Loan Principal & Interest20% min. depositOwner-occupierRefinance	Interest Rate 5.74%	Comparison Rate 5.65%	Fees Application: $0 Ongoing: $0 p.a.	Monthly Payment $876	Go to siteMore Info Compare
Up Home Loan Variable Rate Principal & Interest10% min. depositOwner-occupierOffset account	Interest Rate 6.15%	Comparison Rate 6.15%	Fees Application: $0 Ongoing: $0 p.a.	Monthly Payment $915	Go to siteMore Info Compare
loans.com.au Solar Home Loan Principal & Interest10% min. depositOwner-occupierOffset account	Interest Rate 5.99%	Comparison Rate 6.51%	Fees Application: $0 Ongoing: $0 p.a.	Monthly Payment $900	Go to siteMore Info Compare
Bendigo Bank Express Variable Home Loan Principal & Interest10% min. depositOwner-occupierOffset account	Interest Rate 5.97%	Comparison Rate 6.12%	Fees Application: $250 Ongoing: $10 per month	Monthly Payment $898	Go to siteMore Info Compare
Newcastle Permanent Building Society Real Deal Home Loan Principal & Interest20% min. depositOwner-occupierOffset account	Interest Rate 6.04%	Comparison Rate 6.08%	Fees Application: $595 Ongoing: $0 p.a.	Monthly Payment $905	Go to siteMore Info Compare	$2,000 refinance cashback offer Eligible refinancers who apply online and borrow $250K+ (LVR 80% or lower) can get a $2,000 cashback. Terms and conditions apply.
Macquarie Bank Offset Home Loan Package Finder AwardPrincipal & Interest40% min. depositOwner-occupierOffset account	Interest Rate 6.14%	Comparison Rate 6.39%	Fees Application: $0 Ongoing: $248 p.a.	Monthly Payment $914	Go to siteMore Info Compare
G&C Mutual Bank Momentum Home Loan Principal & Interest40% min. depositOwner-occupierOffset accountSpecial Offer	Interest Rate 6.19%	Comparison Rate 6.22%	Fees Application: $0 Ongoing: $0 p.a.	Monthly Payment $919	Go to siteMore Info Compare
Tiimely Own Variable Rate Home Loan Finder AwardPrincipal & Interest10% min. depositOwner-occupier	Interest Rate 5.94%	Comparison Rate 5.95%	Fees Application: $0 Ongoing: $0 p.a.	Monthly Payment $895	Go to siteMore Info Compare
Mortgage House Chameleon Home Loan Principal & Interest50% min. depositOwner-occupierOffset account	Interest Rate 5.99%	Comparison Rate 6.03%	Fees Application: $600 Ongoing: $395 p.a.	Monthly Payment $900	Go to siteMore Info Compare
Unloan Variable Home Loan Principal & Interest20% min. depositInvestmentRefinance	Interest Rate 6.04%	Comparison Rate 5.95%	Fees Application: $0 Ongoing: $0 p.a.	Monthly Payment $905	Go to siteMore Info Compare
Macquarie Bank Basic Home Loan Principal & Interest20% min. depositInvestment	Interest Rate 6.44%	Comparison Rate 6.46%	Fees Application: $0 Ongoing: $0 p.a.	Monthly Payment $944	Go to siteMore Info Compare
Macquarie Bank Basic Home Loan Principal & Interest20% min. depositOwner-occupier	Interest Rate 6.20%	Comparison Rate 6.22%	Fees Application: $0 Ongoing: $0 p.a.	Monthly Payment $920	Go to siteMore Info Compare
Macquarie Bank Basic Home Loan Principal & Interest40% min. depositOwner-occupier	Interest Rate 6.14%	Comparison Rate 6.16%	Fees Application: $0 Ongoing: $0 p.a.	Monthly Payment $914	Go to siteMore Info Compare
Macquarie Bank Basic Home Loan Principal & Interest40% min. depositInvestment	Interest Rate 6.34%	Comparison Rate 6.36%	Fees Application: $0 Ongoing: $0 p.a.	Monthly Payment $934	Go to siteMore Info Compare
Macquarie Bank Offset Home Loan Package Principal & Interest20% min. depositInvestmentOffset account	Interest Rate 6.44%	Comparison Rate 6.69%	Fees Application: $0 Ongoing: $248 p.a.	Monthly Payment $944	Go to siteMore Info Compare
loans.com.au Variable Home Loan Principal & Interest10% min. depositOwner-occupier	Interest Rate 6.04%	Comparison Rate 6.06%	Fees Application: $0 Ongoing: $0 p.a.	Monthly Payment $905	Go to siteMore Info Compare
loans.com.au Solar Home Loan Principal & Interest10% min. depositInvestmentOffset account	Interest Rate 6.19%	Comparison Rate 6.58%	Fees Application: $0 Ongoing: $0 p.a.	Monthly Payment $919	Go to siteMore Info Compare
Newcastle Permanent Building Society Real Deal Home Loan Principal & Interest20% min. depositInvestmentOffset account	Interest Rate 6.24%	Comparison Rate 6.28%	Fees Application: $595 Ongoing: $0 p.a.	Monthly Payment $924	Go to siteMore Info Compare	$2,000 refinance cashback offer Eligible refinancers who apply online and borrow $250K+ (LVR 80% or lower) can get a $2,000 cashback. Terms and conditions apply.
Up Home Loan Fixed Rate Principal & Interest 5Y Fixed10% min. depositOwner-occupierOffset account	Interest Rate 6.45%	Comparison Rate 6.28%	Fees Application: $0 Ongoing: $0 p.a.	Monthly Payment $945	Go to siteMore Info Compare
Up Home Loan Fixed Rate Principal & Interest 1Y Fixed10% min. depositOwner-occupierOffset account	Interest Rate 6.50%	Comparison Rate 6.19%	Fees Application: $0 Ongoing: $0 p.a.	Monthly Payment $949	Go to siteMore Info Compare

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Frequently asked questions

• Do you have to be Muslim to qualify for this type of loan?

  No, there is no restriction on non-Muslims taking out Sharia-compliant home loans. However, as there is no financial benefit to non-Muslims, it's not often an option offered to them.

• Are there any benefits of these loans beyond religious adherence?

  There are no significant commercial benefits or features of Islamic home loans that wouldn't be offered with a non-Islamic-compliant loan.

• Is there really a difference between Islamic and non-Islamic home loans?

  Some argue that Islamic finance simply interchanges terminology and concepts and that Sharia-compliant home loans don't differ greatly from standard home loans. This is because they believe that both Islamic and conventional banks make the same return, except conventional banks label it "interest" while Islamic institutions label it "profit". However, you must consider additional concepts such as risk-sharing and the absence of ambiguity which make Islamic home loans unique compared to traditional loan products.
  
  On this subject, Russell Murphy at Iskan Finance states, “In Australia, the Muslim community comprises Pakistanis, Fijians, Indians, Malaysians, Egyptians and so on. It would not be uncommon for some people to come to me and say, ‘I want my Imam to sign off on your program’. But then we'd have to do the same for everyone and try to represent all the different religions, which would be impossible. We offer an alternative product and it's up to the customer to decide whether or not this fits with their philosophical agenda.” Ultimately, it's up to you to interpret the concepts of Islamic finance and decide whether the product is consistent with your beliefs.

• Do they charge interest?

  No. Islamic home loans do not charge or express interest. The way it works is that the financial institution mortgages the property and charges you an amount that you pay in rent. The more funds you repay, the more ownership you have in the property until it is paid off in full. Keep in mind that just because the institution doesn't charge interest doesn't mean it doesn't charge a profit. The financial institution still makes a profit from leasing the property to you.

• Is stamp duty and insurance payable? Are there any exemptions?

  When it comes to stamp duty, insurance and other costs, the lessor can agree to handle these expenses when they buy the property on your behalf or it may be up to you to handle them. If the financial institution pays for stamp duty at the initial stage of buying the property, keep in mind that the stamp duty amount will be added to your overall lease.
  
  However, Murphy provides insight into Iskan Finance and its treatment of stamp duty and associated purchase charges. “It's treated the same as any contemporary mortgage facility, when the customer turns up, depending on how much equity they have, they have to provide the sufficient funds to pay the deposit, stamp duty, valuation and other charges. However, if they require less than 80% LVR, the financial institution generally absorbs the cost of LMI.”
  
  Keep in mind that the requirement for stamp duty will differ depending on the state in which you reside. However, in NSW there are no special exemptions for stamp duty regarding Islamic finance transactions.

• Are the lease payments fixed for the term of the loan? What happens when the interest rate changes?

  The nature of the lease payments depends on the lease structure that is set out by the lessor. The agreement will also set out what happens to your rental payments when market interest rates fluctuate. Generally, it's not possible in Australia to provide a fixed rental for the entire term of a mortgage.

• Will I pay more for an Islamic home loan compared to a non-Islamic home loan?

  Depending on the financial institution, Islamic home loans may be slightly more expensive than non-Islamic home loans. However, this will depend on how the financial institution determines the profit made on the sale.

• How does the financial institution make money?

  The financial institution makes money by charging a profit rate on your rental instalments.

• Can I carry out home improvements? What happens if I make a capital gain?

  With some lenders such as Iskan Finance, it may be possible for you to conduct home improvements on the property. According to Murphy, “Capital gain will belong to them solely because they own the property so they can benefit from any capital gain they make.”

• What documentation will I need to provide?

  Generally, the financial institution will need you to supply proof of your income and ability to meet your rental payments, proof of funds to complete the deposit as well as a minimal rental deposit if you intend to live in the home.

• Can I live in the property before I have paid my rental payments in full?

  During the lease period, ownership of the property remains with the financier, but you have the right to use the property until the expiry of the agreement period when the ownership of the property is transferred to you in the form of a gift given that you've repaid the amount in full.