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Islamic home loans

Islamic home loans allow you to fulfil the dream of buying a home while living in accordance with Islamic law.

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.

Compare a wider range of mortgages here

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.

Islamic finance 4

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. 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 of 5.2% offered by the lender, 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. 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.

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

Pros
  • Sharia acceptance. This alternative method of obtaining a home is designed to better align with Sharia law to offer Muslims a means of pursuing home ownership without offending their religious values.
  • Features. In most cases, you are offered the same features as a typical home loan. Some of these help you in achieving property ownership sooner while others can give you the option of lower payments if you make lease payments only.
  • Pre-approval. Your lending institution may approve your circumstance beforehand, allowing you to immediately choose a home within the price range they agreed upon and facilitating your application process.
Cons
  • Could be more expensive. The unique circumstances surrounding an Islamic home loan and the limited size of the market can cause lenders to charge more compared to a typical home loan in the form of profit.
  • Documentation. The providers of this style of finance all operate under the NCCP and will make independent inquiries into your ability to meet the financial commitments without undue hardship. This often means Islamic finance comes in the form of a "full doc" application process.

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.

Compare a wider range of home loans from non-Islamic lenders

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
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
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
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
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
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
$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.
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
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
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
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
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
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
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
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
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
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
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
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
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
$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.
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
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
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38 Responses

    Default Gravatar
    SheAugust 27, 2023

    Who is the title-holder in Non-islamic and Islamic home loans?

      AvatarFinder
      RichardSeptember 1, 2023Finder

      You’d need to check with a specific lender to be sure, and get legal advice, but my understanding is the lender’s name is on the title until you’ve paid the full value of the home. It’s effectively a lease to own contract.

    Default Gravatar
    HasanMarch 16, 2019

    Hi! Is it safe to take home loans from other institutions rather than the bank?

      AvatarFinder
      JoshuaMarch 17, 2019Finder

      Hi Hasan,

      Thanks for getting in touch with Finder. I hope all is well with you. 😃

      If you are asking about the level of safeness and security of applying for a loan from institutions other than banks, the answer is yes. Most non-bank home loan providers would provide a safe environment for you to obtain a loan from. Of course, you should do independent research to confirm that the lender you are working with is registered and legitimate.

      If you need to explore your options, you may want to speak to a mortgage broker. They have the necessary knowledge and experience to help you find the best lender that meets your needs, preference, and budget.

      Moreover, before you apply for a specific loan, please make sure that you’ve read the relevant T&Cs or PDS of the loan products. You can also check the eligibility requirements to determine whether the product is right for you or not.

      I hope this helps. Should you have further questions, please don’t hesitate to reach out again.

      Have a wonderful day!

      Cheers,
      Joshua

    Default Gravatar
    ANJuly 9, 2017

    Hi. I am a Muslim women engineer. I recently have got a permanent job in ACT. Before this job, I was jobless for more than 1 year. I am living here on permanent residency. I have some savings of about AUS $ 40,000 and my annual salary is more than $ 90,000/=. I want to buy a property while fulfilling my religious restrictions regarding Ribah/ interest. Please intimate how I can proceed.

    Kind regards

      Default Gravatar
      LiezlJuly 10, 2017

      Hi AN,

      Thanks for your question.

      You may approach any of the Islamic banking institutions listed above that offer Sharia-compliant products to know your options. Better still, you enlist the services of a mortgage broker who can best help you find a suitable financing.

      Cheers,
      Liezl

    Default Gravatar
    AnwarJanuary 18, 2017

    how the accounting treatement for islamic home finance should post?

      AvatarFinder
      MayJanuary 19, 2017Finder

      Hi Anwar,

      Thank you for your question and for contacting finder.com.au we are a financial comparison website and general information service we are not mortgage specialists/home loan providers so can only offer general advice.

      I’m afraid we may not be able to provide you with an answer to that question. The accounting treatment will be determined by the lender/bank that offers the Islamic Home Loan.

      Regards,
      May

    Default Gravatar
    AbdulNovember 2, 2016

    I am a Muslim who lives in Indoensia, Looking for Loan amount of U$55,000, I urgently Need to Recover my Family and Establish Muslim Fashion Store

      AvatarFinder
      HaroldNovember 3, 2016Finder

      Hello Abdul,

      Thank you for your question.

      Basically, to qualify for an Islamic home loan. An Islamic home loans are offered as full-documentation products. This means you’ll need to provide evidence of funds for your deposit, your savings history, employment history as well as information related to any other assets or liabilities you have.

      If you wish to compare your Islamic home loans, in the above section “Are there any Islamic banking institutions in Australia?” you’ll find list brokers and providers that specialize in Islamic home loans.

      I hope that helps.

      Cheers,
      Harold

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