This or That: Conventional Vs Islamic Mortgage
A mortgage is a convenient way of buying a home when someone is short on finances. The borrower pays off the money in instalments to the lender. However, along with basic instalments, the interest rate is also charged. That said, in an Islamic mortgage, the borrower is exempted from paying interest rates; rather, they have to pay rent or lease of the home. This is because the Shariah law forbids charging interest on loan amounts.
Before discussing other differences between Islamic mortgages and conventional mortgages, let’s have a look at the definitions.
What is an Islamic Mortgage
The Islamic mortgage is laid on a different foundation contrary to a conventional mortgage system. An Islamic mortgage is simply a home financing in which the lender is restricted to charge interest rates from the borrower. Instead, the lender will purchase the property on behalf of the borrower and will charge rent or lease.
What is a Conventional Mortgage
In conventional mortgages, a lender offers finances to the borrower with a promise of return of finances, including interest. In conventional systems, the lender is not linked with the asset by any means; the only concern is regarding the finances.
Differences Between Islamic and Conventional Mortgage
Now that you are aware of the definitions let’s move towards the difference between both mortgages.
Islamic Vs Conventional Mortgage: Interest Rate
Interest (Riba) is impermeable (Haram) in Islam and therefore, an Islamic mortgage is free from any kind of interest. On the contrary, the conventional mortgage depends on the interest rate and borrowers are offered money with clear terms and conditions of paying interest on principal amount. Depending on multiple factors, the interest rate can be between 1.99% to 8%.
For more information on conventional property mortgages, read through our blog on property mortgages in Dubai and Abu Dhabi.
Islamic Vs Conventional Mortgage: Property Ownership
In an Islamic mortgage, the borrower and the lender own equitable shares. The lender owns the share until the borrower has completely paid off the amount. Once the amount is paid off, the property will be transferred to the borrower’s name. However, the property transfer varies from ownership model to model. For instance, in a partnership model, the borrower will own the 99-year lease of the property. Once the lease amount is paid off, the property is transferred to the borrower’s name.
In conventional mortgages, the lender only has legal rights to confiscate the property if borrowers fail to pay the agreed amount. Other than that, the borrower owns the property and can sell it at any time after discussing it with the lender to recover the amount. Here is how to sell mortgage property in Dubai.
Islamic Vs Conventional Mortgage: Additional Charges
Since Islamic mortgage is Shariah-compliant, additional charges like late payment fees or prepayment fees are not charged in the Islamic mortgage. Instead, the monthly instalment agreed upon by both parties includes all the charges, exempting the borrower from paying any hidden charges.
On the other hand, borrowers are subjected to penalties if they are unable to pay the instalment on the pre-decided date. Moreover, the penalty even increases with time and can even cause legal trouble to the borrower. Therefore, it is necessary to calculate your budget prior to applying for a mortgage. Aside from that, here are some other things to consider before securing a mortgage.
Islamic Vs Conventional Mortgage: Financial Risk
Islamic mortgage offers ownership or financing models to the borrower, making them an equal risk-sharing partner. In case of any foreclosure, the lender and borrower both will equally share the responsibilities. Another aspect of it is that the borrower is not allowed to sell the property during the mortgage period.
Conventional mortgages do not share any kind of burden in case of loss due to natural disasters or foreclosure. However, the borrower is the sole owner of the property and can sell the property after discussing it with the lender.
Islamic Vs Conventional Mortgage: Financing Models
The Islamic mortgage offers a co-ownership model (Musharakah Mutanaqisa) or diminishing partnership. In this model, the borrower as a co-owner enjoys privileges and stakes in the property until the amount is completely paid off. This type of financing model is limited to Islamic financing and is hard to find in other types of conventional home mortgages.
For more information, read through our blog on home loans Vs loans against property.
FAQs
Is it necessary to be a Muslim to secure an Islamic mortgage?
No, Muslims and non-Muslims both can acquire Islamic mortgages from the banks.
How does the rent payment in Islamic mortgages differ from Riba?
The rent charged in an Islamic mortgage is completely different from Riba as no loan amount is involved. The bank purchases the property and rents or leases it out to the borrower and charges against it.
Is Islamic mortgage more competitively priced than conventional banking?
Yes, Islamic baking is competitively priced and also has some other benefits that borrowers can avail of.
This was all about Islamic mortgage Vs conventional mortgage. Different banks in the UAE offer a variety of mortgages to help customers buy their dream home. Whether it is a home loan for expats or for a luxury property, you can secure it all from the bank.
However, all the banks ask about your budget and the type of property you are planning to buy. To avoid getting your loan application rejected, browse through these properties for sale in the UAE and choose from an array of options before approaching the bank.
Besides, if you are confused between cash and mortgage, read through our blog on cash Vs mortgage for buying a house in the UAE.
Stay tuned to dubizzle’s property blog for more information on the Islamic financial system and conventional banking.