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Islamic home loans

You can fulfil the dream of buying a home while living in accordance with Islamic law.

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Islam prohibits interest from being charged on home loans. 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 documentation and low documentation versions, depending on your leasing needs.

How does an Islamic home loan work?

With an Islamic home loan, you can choose the home and then the financial institution will buy it from the seller. This same financial institution then agrees to lease the home for a pre-determined period, which is known as Ijarah Muntahiyah Bittamlik. 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.

As general manager of Iskan Finance, Russell Murphy states, “For our customers, at the date of settlement, they are registered as the owner. We’ve taken the mortgage from them, and secured a transaction agreement that doesn’t express principal or interest.

“This style of mortgage financing has many of the hallmarks of an operating lease with the object of better alignment with Sharia law, hopefully providing financing alternatives for Muslims otherwise uncomfortable to pursue home ownership.”

Compare a wider range of mortgages here

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

With around 1.7% of the Australian population being Muslim, there are limited Sharia-compliant home finance programmes on the market.

However, according to Ernst & Young, Islamic banking assets have experienced rapid growth and are forecast to increase by an average of 19.7% a year until 2018. 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.

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.

  • Prohibition of paying and receiving interest (ribā): Interest cannot be charged or paid in any financial transaction under Islamic law.
  • Prohibition of uncertainty (gharār): 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.

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

The purchase of a property is typically financed through a mortgage agreement where the property 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 that are owed.

In contrast, some of the earlier Islamic home finance programmes in Australia involved the institution partnering in the purchase of the property and then selling it to the buyer at a cost plus profit or joining in a capital gain on the sale of the property. For the period of the transaction, the buyer amortised the outstanding debt through rental instalments.

More recent product developments, however, have stamp duty and capital gains tax implications and have looked to the Islamic principles of Ijara (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 frame.

Murphy states, "This means that every rental payment the customer makes will increase their equity in the property and subsequently decrease the provider’s equity. Once the customer has fully repaid the amount, there’s no actual transfer of title involved and this addresses tax implications.

“Islamic finance is largely about the philosophical side of things – it’s where Western banking meets Islamic banking. We offer an alternative solution for Muslims in an Australian landscape.

“Ours is a common mortgage transaction that’s fully functional. It has all the bells and whistles of a traditional banking facility, such as an offset with a debit card attached to it and the ability to transact over the Internet, but the main difference is that although we refer to capital, we don’t express principal and interest. Rather, we charge a rental facility fee.

“In a highly regulated environment, you have to be pragmatic about what you can and can’t offer. When people have English as a second language, you have to place yourself on the moral high ground, as people often misunderstand what they’ve been told, so National Consumer Credit obligations aside, we’re very careful to disclose all the costs involved.”

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

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.

How to compare Islamic home loans

Murphy stresses that when comparing Islamic home loans, you should keep an eye out for the service level offered by the provider.

“Just like any conventional facility in any other organisation, customers should be alert to the service aspect of the product. I believe Iskan Finance operates as an ethical business and we’re firm on NCCP (National Consumer Credit Protection Act) compliance so people should take the comfort in the fact that we, and other providers, respect people’s rights under Australian law."

Additionally, Murphy recommends that you conduct thorough research regarding the regulations, laws and associated costs of a home loan. “Do your research and have a look at the legislation in your state, particularly in regards to stamp duty. We always ask the customer to have a chat with a conveyancer so they fully understand what the costs will be. There’s no point in slapping together an application that has no chance of approval, so we teach people the discipline of submitting an application that will be approved.”

Islamic home loans come with many of the features that are also offered with traditional home loans. Compare the features among different lenders before deciding which home loan is right for you.

  • Early payoff. You should ensure that you can make a lump-sum payment in the future. Murphy says that the vast bulk of Iskan customers are happy to make extra payments if they can. “It doesn’t matter whether it’s a customer of Iskan or any other institution, people are wary of exposure to debt and we find customers are pre-paying their way out of their mortgage as a common defensive strategy.”
  • Loan to value ratio (LVR). The LVR ratio refers to the amount of the property value or purchase price you can borrow from the lender. A loan with a high insured LVR allows you to borrow funds without paying lenders mortgage insurance (LMI).
  • Repayments. Look for a lender that offers weekly, fortnightly or monthly payments so you can arrange your payments to suit your income.
  • Rate. Although, technically, interest isn’t charged for an Islamic home loan, the financial institution will still be charging fees in the form of rent or profit rate. Make sure you have a clear understanding of exactly how much extra you’re being charged as a result of the profit rate.
  • Ongoing fees. Some institutions will charge annual fees, which will increase the amount of your payments. Look for financial institutions with low or no account-keeping fees, so you can focus on meeting your repayments and paying out your lease in full.

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 that is within the price range they agreed upon, thereby 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 National Consumer Credit Protection Act and will make independent enquiries 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 there any Islamic banking institutions in Australia?

While there are several foreign banks in Australia, including the Arab Bank and HSBC, few of them offer Islamic home loans. However, Westpac and National Australia Bank (NAB) have introduced Sharia-compliant products to the market. In 2010, Westpac introduced a Special Interbank Placement for Islamic Financial Institutions while NAB offers an interest-free personal loan for low-income earners that receive Centrelink benefits, which could be an alternative for Islamic Australians. Currently, the main Australian financial institutions offering Sharia-compliant products or assistance are Iskan Finance, Equitable Financial Solutions, Amanah Islamic Finance, MCCA Islamic Finance and Investments, and Islamic Cooperative Finance Australia Limited (ICFAL).

How do I qualify for an Islamic home loan?

Generally, 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. In regards to Iskan Finance and their application process, Murphy states, “We generally start the application process with a deposit equation. We’re inclined to let the customer know that there will be costs accountable such as stamp duty, legal fees and conveyancing costs. As full-doc loans, people need to have adequate income and they need to be able to document their income. We talk about what will happen over the next 30 years or so, we discuss how they’ll set their lease payments and whether or not they like the arrangement is up to them to decide.”

Frequently Asked Questions (FAQ)

Click here to read a full interview with Russell Murphy from Iskan Finance *Please note that the home loan offers listed below are general site-wide offers, and these lenders currently do not offer Islamic home loans.

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

1 - 20 of 51
Name Product Comparison Rate Fees Monthly Payment

Ubank Neat Variable Home Loan
Principal & interestOwner-occupier40% min. deposit
Principal & interestOwner-occupier40% min. deposit
Interest Rate
2.64%
2.65%
  • Application: $0
  • Ongoing: $0 p.a.
Get flexibility and the option to make unlimited extra repayments with this variable rate loan.

Unloan Variable Home Loan
Principal & interestOwner-occupier20% min. deposit Refinancers only
Principal & interestOwner-occupier20% min. deposit Refinancers only
Interest Rate
2.64%
2.56%
  • Application: $0
  • Ongoing: $0 p.a.
A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.

loans.com.au Smart Booster Discount Variable Home Loan
Principal & interestOwner-occupier20% min. deposit
Principal & interestOwner-occupier20% min. deposit
Interest Rate
2.60%
2.96%
  • Application: $0
  • Ongoing: $0 p.a.
Get a low discounted variable rate loan. Requires a 20% deposit. Get your loan processed fast and settle within 30 days.

Nano Variable Home Loans
Principal & interestOwner-occupier20% min. deposit
Principal & interestOwner-occupier20% min. deposit
Interest Rate
2.74%
2.74%
  • Application: $0
  • Ongoing: $0 p.a.
Competitive rate with zero fees, fast approval and a 100% free offset account. Available for refinancers and existing buyers purchasing their next home. 20% deposit required.

Macquarie Bank Basic Home Loan
Principal & interestOwner-occupier40% min. deposit
Principal & interestOwner-occupier40% min. deposit
Interest Rate
2.84%
2.84%
  • Application: $0
  • Ongoing: $0 p.a.
This flexible variable rate loan requires a 40% deposit or equity. Get fast online approval and $0 application fee and $0 ongoing fees.

IMB Budget Home Loan
Principal & interestOwner-occupier20% min. deposit
Principal & interestOwner-occupier20% min. deposit
Interest Rate
2.84%
2.85%
  • Application: $449
  • Ongoing: $0 p.a.
A low-rate, no-frills home loan for borrowers with a good deposit and unrestricted repayments. $0 application fee for eligible borrowers with principal-and-interest repayments and deposits of at least 20%.

Yard Variable Home Loan
Principal & interestOwner-occupier40% min. deposit
Principal & interestOwner-occupier40% min. deposit
Interest Rate
2.64%
2.66%
  • Application: $0
  • Ongoing: $0 p.a.
Get a low variable rate loan with this online lender. 100% offset account. Requires a 40% deposit.

Ubank Neat Variable Home Loan
Principal & interestOwner-occupier20% min. deposit
Principal & interestOwner-occupier20% min. deposit
Interest Rate
2.84%
2.86%
  • Application: $0
  • Ongoing: $0 p.a.
A competitive variable rate loan that comes with a 100% offset account. 20% deposit required.

HSBC Home Value Loan
Principal & interestOwner-occupier30% min. deposit
Principal & interestOwner-occupier30% min. deposit
Interest Rate
2.77%
2.78%
  • Application: $0
  • Ongoing: $0 p.a.
$3,288 refinance cashback offer
This competitive variable rate loan is available for borrowers with 30% deposits. Eligible refinancers borrowing $250,000 or more can get a $3,288 cashback. Terms and conditions apply.

Greater Bank Great Rate Discount Variable with Family Pledge Home Loan
Principal & interestOwner-occupier-10% min. deposit
Principal & interestOwner-occupier-10% min. deposit
Interest Rate
2.79%
2.80%
  • Application: $0
  • Ongoing: $0 p.a.
Pay no deposit or LMI and get a discounted rate with this family pledge loan. Requires a family member to act as guarantor. NSW, QLD and ACT only.

OneTwo Variable Rate Home Loan
Principal & interestOwner-occupier20% min. deposit Refi Only
Principal & interestOwner-occupier20% min. deposit Refi Only
Interest Rate
2.59%
2.49%
  • Application: $0
  • Ongoing: $0 per month
$5,000 refinance cashback.
A variable rate loan for owner-occupier refinancers living in NSW, VIC, QLD or SA metro and inner regional areas. Get an extra 0.15% off your rate as you repay the loan and get up to $2,500 in bonus payments. Terms and conditions apply.

homeloans.com.au Low Rate Home Loan with Offset
Principal & interestOwner-occupier40% min. deposit
Principal & interestOwner-occupier40% min. deposit
Interest Rate
2.64%
2.64%
  • Application: $0
  • Ongoing: $0 p.a.
A competitive rate with no application or ongoing fees. This loan is not available for construction.

Tic:Toc Live in Loan Variable Rate
Principal & interestOwner-occupier10% min. deposit
Principal & interestOwner-occupier10% min. deposit
Interest Rate
2.59%
2.60%
  • Application: $0
  • Ongoing: $0 p.a.
A competitive variable rate product with no application or valuation fees offered by a 100% online lender.

Unloan Variable Home Loan
Principal & interestInvestment20% min. deposit Refinancers only
Principal & interestInvestment20% min. deposit Refinancers only
Interest Rate
2.94%
2.86%
  • Application: $0
  • Ongoing: $0 p.a.
Investors can get a low variable rate. Apply online and get fast approval. Backed by the Commonwealth Bank.

Athena Variable Home Loan
Principal & interestOwner-occupier40% min. deposit
Principal & interestOwner-occupier40% min. deposit
Interest Rate
2.64%
2.64%
  • Application: $0
  • Ongoing: $0 p.a.
Owner occupiers with 40% deposits or equity can get this competitive variable rate loan. No upfront or ongoing fees.

G&C Mutual Bank Momentum Home Loan
Principal & interestOwner-occupier40% min. deposit
Principal & interestOwner-occupier40% min. deposit
Interest Rate
2.74%
2.76%
  • Application: $0
  • Ongoing: $0 p.a.
A variable rate loan for owner-occupiers looking to refinance. This loan has low fees and a 100% offset account.

Well Money Balanced Variable
Principal & interestOwner-occupier20% min. deposit
Principal & interestOwner-occupier20% min. deposit
Interest Rate
2.60%
2.63%
  • Application: $250
  • Ongoing: $0 p.a.
A very low interest rate for home buyers with 20% deposits saved. Add an offset account for a small fee.

Newcastle Permanent Building Society Real Deal Home Loan
Principal & interestOwner-occupier20% min. deposit
Principal & interestOwner-occupier20% min. deposit
Interest Rate
2.87%
2.91%
  • Application: $595
  • Ongoing: $0 p.a.
This variable rate loan requires a 20% deposit and has an offset account.

Nano Variable Home Loans
Principal & interestInvestment20% min. deposit
Principal & interestInvestment20% min. deposit
Interest Rate
3.04%
3.04%
  • Application: $0
  • Ongoing: $0 p.a.
Investors can get this no-fee variable rate loan. You will need a 20% deposit. Fast online approval. Available for refinancers and existing buyers purchasing their next property.