How Does An Islamic Home Loan Work?

How Does An Islamic Home Loan Work?

Thinking about purchasing a property and looking for more home loan options to finance your dream home? Why not consider taking up Islamic Home Financing? Read on to learn how an Islamic home loan works and its benefits.

What Is Islamic Home Financing?

The main difference between a conventional home loan and Islamic home loan is that an Islamic home loan must be Shariah compliant. What it means to be Shariah compliant is that the loan must be free from financial practices that are not allowed in Islamic teachings, such as interest (riba), speculation (gharar) or any transactions deemed unlawful (haram).

Another key differentiating factor between Islamic home financing and conventional home financing is there are no interest charges involved. While a conventional home loan would charge you interest, an Islamic home loan would not.

When it comes to Islamic home loans there are usually two options offered in Malaysia, which are Murabahah (buy and sell), Ijarah (leasing services) and the diminishing Musyarakah (joint partnership) concept.

The Murabahah concept works in a way a seller tell the buyer the cost of a commodity and then have an agreement that a specific amount of profit (where the price will be marked up) will be added. Therefore Murabahah is a sale of a commodity for cash or deferred price.

As for Ijarah, the concept is to provide services and goods on a temporary basis by providing products or services on a rental basis. A common Ijarah concept used for Islamic home financing is the lease-ending ownership known as Ijara Wa Iqtina. For this type of Ijara contract, the lessee will own the leased asset at the end of the lease period where transfer of ownership will happened once lease period has ended.

While the Musyarakah concept means you and the bank join in a partnership to purchase the property. Usually a diminishing Musyarakah is used for Islamic home financing. The bank purchases the property then leases the property back to you at an agreed rental price which will include profit for the bank. Progressively the bank’s shareholding in the property will lessen and in the end you will own the property

Benefits of an Islamic Home Loan
There are several benefits you will get if you choose to take up an Islamic home loan which are as below:

Customers who opt for Islamic home loan to finance their property purchase and then make an early settlement will be entitled to enjoy a rebate.

As part of the government’s initiative to boost Islamic financing in Malaysia, all Islamic home loans will receive 20% stamp duty exemption under Budget 2016.

This article is contributed by CompareHero.my, Malaysia’s most trusted financial comparison portal dedicated to saving you time and money by comparing all credit cards, broadband plans and personal loans in Malaysia.

Source: CompareHero.my

 Property Buyer Guides & Tips, finance, housing loan

Prev. Article Next Article