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Would you really like to own your own home, but find it a struggle to save up the whole cost of a suitable property? If you’d ideally like a home loan but are worried about it contravening Sharia law, take heart. There are forms of Islamic home loans that mean your dream can now come true.

A Sharia-compliant home loan means you can move into the property you want and gradually pay it off without compromising your religious principles.

How Islamic home loans work

An Islamic home loan starts when you choose a property and your lender agrees to buy it, in return for which you make a ijarah muntahiyah bittamlik agreement to live in the property for an agreed length of time and pay rent to the lender.

At the end of this time, the lender will give you the property as a gift. This means that you are never actually in debt but you have a secure home that you will ultimately own. If you are willing to make higher rental payments, lenders will often agree to let you make extra payments so you can become a homeowner sooner.

How Islamic home loans reflect Sharia principles

Although the principle of ribā prevents Muslims from taking out conventional home loans, because it would be wrong to pay interest, a loan like this does not require you to do so.

The element of risk involved is acceptable because you will have a clear agreement operating in accordance with rules that everybody involved understands. The arrangement rewards both parties and functions as a musharakah partnership.

Finding the right Islamic home loan

When considering an Islamic home you will need to think carefully about what you can afford. Different lenders have different rules about the size of deposit they require from you in comparison to the value of the property they will buy. They also charge rent at different rates once you move in, so you should really speak to several lenders and compare the rates, as well as comparing any fees involved.

Bear in mind that your choice is not limited to bank based in predominantly Islamic countries. Some of the larger Australian banks also offer Sharia-compliant loans.

Are you eligible for a loan?

Just as with other kinds of home loan, and in keeping with the principle of gharār, you will need to supply your lender with proof of your financial circumstances before any loan agreement can be made. You will need to show that you’re good at managing money and that you have saved money successfully in the past (which can include money saved for your deposit). The lender will need to be persuaded that your income is adequate to pay off the loan over the term you want.

Pros and cons of Islamic home loans
  • Compliant with Sharia law
  • No need to get into debt
  • Often let you pay off the loan early
  • Covered by the National Consumer Credit Protection Act
  • Not as much choice as with other kinds of home loan
  • Can be more expensive than other kinds of home loan

The following mortgage offers are not Islamic home loans. We’ve shown you these home loans to help you compare what’s available in the Australian mortgage market, and make a more informed financial decision. 

To compare and apply for Islamic home loans, contact a Sharia-compliant financial institution, such as MCCAICFALAmanah, Hejaz Financial Services, or Iskan Finance. You can also contact other banks to find out if they offer Islamic home loan options.