What Makes Islamic Mortgage Different from Conventional Mortgage?

What is the difference between Islamic Mortgage and Conventional Mortgage?

The main distinction between an Islamic and a conventional mortgage is the sort of relationship that underpins the transaction. A traditional mortgage is a loan from a creditor to a debtor. In contrast, Islamic Finance takes a different approach: it is a partnership between co-owners. In the following article, we will talk more clearly about the difference between Islamic Mortgage and Conventional Mortgage.

Riba (Interest) Free

Lending money to profit from any commercial or investment activity, including the financing of real estate, is not an acceptable method of commerce, according to Islamic legal jurisprudence. To put it another way, riba (or interest) is forbidden.

The most obvious reason is that a loan is considered a form of charity in Islam (qard al hasan) – an opportunity for one person to assist another who is in a difficult situation. The lender should only expect to be reimbursed for the amount lent. A loan is not a means of making money.

It is not also acceptable in Islam to purchase or sell something that has no intrinsic value. A loan with interest is essentially a way of repaying a loan with more money. Because money has no intrinsic value, you cannot purchase it. This rule improves market stability for the benefit of the community.

Islamic Finance developed a home financing program on an entirely different foundation: a partnership, in response to a mortgage loan arrangement that was clearly unacceptable according to Islamic financial guidelines.

The Co-Ownership Model

There is a type of contract which we call “Musharakah“. Musharakah is a partnership agreement in Islamic finance in which partners share in the profits and losses of a business. Musharakah is a type of Shirkah al-Amwal (or partnership), which in Arabic means “sharing.” Since Shariah prohibits interest in lending, Mushakarah allows that the distribution of the profit among the partners on pre-agreed ratios, while each partner shares the losses in proportion to their contribution.

Suppose that Mohamad wants to start a business but he does not have enough funds. His friend Bilal owns extra funds and wants to be the financier in Musharakah with Mohamad. In this situation, these two people would agree on the terms and begin a business that allows them to share portions of the profits and losses. This negates the need for Mohamad to take a loan from Bilal.

Benefits of the Co-Ownership Model 

  • In the event of a natural disaster such as a hurricane or tornado, homeowners with traditional loans often stay without attention by conventional loans. They can be responsible for repaying their mortgage loan in full to the bank if the property gets any damage. They share this risk as co-owners with Islamic Mortgage, on the other hand.
  • Eminent domain is something few people ever expect to face, so it takes affected homeowners by surprised. When the government decides to take a property for public use, we call it eminent domain. Although the government should compensate the homeowner, the amount paid does not usually meet the amount owed on the mortgage. In this case, Islamic mortgages shares the risk.
  • No one wants to consider the possibility of foreclosure. However, in the event of great difficulty, when homeowner are unable to continue to pay for their property, this is exactly what they may face. Sometimes with a traditional mortgage, the sale of your home does not cover the amount you owe the bank. In that case the bank or lender can – and will – go after your personal assets to make up the difference. If the profits from the sale of the residence do not cover half of the property, the Islamic Mortgage do not pursue their personal assets. Under this structure, the customer is more protected.

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