Can I get a mortgage that complies with sharia law?

Any general questions you might have in regards to loans and finance.
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Otto Dargan
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Re: Can I get a mortgage that complies with sharia law?

Post by Otto Dargan »

Hello Mean Green.

There are a few lenders and Islamic finance institutions in Australia who provide home loans which are sharia-compliant.

These institutions have a different approach to banking and building relationships with their clients. They provide competitive deals while still conforming with the principles of sharia law, although they may charge rent and make a profit out of the entire loan.

Generally, a sharia compliant home loan has four models to assist you in purchasing a property:
  • Mudarabah - Loosely translated as ‘profit-and-loss sharing’, it is similar to a partnership where one partner lends money to another so they can invest it in a commercial enterprise. The first partner invests in the enterprise while the other has the responsibility to manage and work on the investment.
  • Ijara - Meaning ‘lease’, the bank buys the property that you’re looking to purchase and then leases it out to you. The bank transfers the ownership of the property to you after the end of the loan term.
  • Musharaka - Translated as ‘partnership’, you and the lender buy the property together. Afterwards, you gradually buy the bank out of it. To explain, if you put down 20% of the purchase price, the lenders will pay the remaining 80% of the purchase price. You then need to pay monthly rent on the share to the bank, as well as buy more shares in the property. The more shares you own, the less rent you pay to the bank, until you own the property outright at the end of the loan term.
  • Wakala - You make an agreement with the bank that they will work as your agent. By doing this, the bank can use their money to invest in sharia compliant trading activities to generate a target profit for them.
You may even be able to get away with defaults (failure to make repayments) since these institutions generally don’t have any provision to charge additional fees to defaulters, although a small amount of compensation may be charged.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
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Otto Dargan
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Re: Can I get a mortgage that complies with sharia law?

Post by Otto Dargan »

Hi Mean Green,

Yes, you may be able to qualify for the Australian Government’s First Home Owners Grant (FHOG) scheme, under the condition that the application is provided to your bank three weeks before settlement.

Moreover, the grant is given under the condition that each applicant is not a company or trust, i.e. they should be a natural person and each applicant shouldn’t have received the grant previously. Also note that at least one applicant should occupy the home as their principal place of residence for a continuous period of at least six months, starting within 12 months of settlement or construction of the home.

You can have a look at our website to learn more about First Home Owner Grant. You can also give us a call on 1300 889 743 or fill in our free assessment form.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

User avatar
Otto Dargan
Mortgage Specialist
Posts: 7730
Joined: Sat Sep 06, 2008 5:55 pm
Location: Sydney, Australia
Contact:

Re: Can I get a mortgage that complies with sharia law?

Post by Otto Dargan »

Hi marty,

Please note that sharia-compliant home loans may be no different from a conventional home loan in many aspects. Some of its products may help complete the transfer of property ownership sooner, while others may provide the option of lower payments. Despite this, when you consider the circumstances surrounding sharia compliant loans, they may be more expensive than typical mortgages.

There are many factors that you may have to consider before applying for a home loan. Besides the purchase price, there are other costs involved in it. For instance, you may be charged additional fees such as:
  • Purchase stamp duty - A tax levied by your state government on all property purchases based on the size of your home loan.
  • Transfer & Registration fee - A government fee for registering your name on the title of the property and for registering your lender’s mortgage on the title of your property.
  • Conveyancing costs - The costs for hiring a conveyancer to handle the transfer of property into your name.
  • Inspections / Reports - Costs to cover building inspections, pest inspections and strata report.
  • Loan fees - Some lenders may charge an application fee, settlement fee, or valuation fee.
  • Lenders Mortgage Insurance (LMI) - You may need to pay LMI if you’re borrowing more than 80% of the property value. You can use of LMI Calculator as a guide to find out how much LMI you may need to pay.
It is recommended that you speak to a mortgage broker, who is familiar with this type of loan.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

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