Please help me understand the difference between regular and Islamic mortgage and what conditions make it “halal”. Thanks 🙂
In: Economics
The foundational concept to know is that under the rules (or laws – depending on your location) of Islam, it is considered Haram (sin/ wrong/etc ) to charge interest.
So the concept of Islamic Halal mortgage was created. Under this mortgage, the bank or the mortgage issuer buys the house for the person taking the “mortgage” (the customer). And then charges a “rent” to the customer.
But the rent payment is financially engineered to ensure that the bank – over the term of the rent payment agreement – makes back the money it spent on buying the house, and also a healthy profit that covers the cost of it’s capital.
The house is owned by the bank until all the rent payments are completed – post that, the house is transferred to the customer.
In effect – the payments each month are generally and effectively the same, just called a different name (rent instead of principal+ interest).
its a technicality. instead of “borrowing money” to buy a house and then paying the bank back with “interest” for x years you instead make an agreement that the bank “buy” the house, then “leases” it to you for x years (afterwhich it is fully yours). The overall outcome is the same, but “Technically” no money was borrowed at interest.
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