How does a traditional home loan differ from an Islamic home loan?
  • "The purchase of a property is typically financed through a mortgage agreement where the property is financed through borrowed funds from the lender. The borrower is required to repay this loan amount, plus interest, via a predetermined repayment schedule.

    The bank has security over the property, which means that if the borrower defaults on their home loan, the lender can enforce a sale of the property to recover the outstanding funds that are owed.

    In contrast, some of the earlier Islamic home finance programmes in Australia involved the institution partnering in the purchase of the property and then selling it to the buyer at a cost plus profit, or joining in a capital gain on sale. For the period of the transaction, the buyer amortised the outstanding debt through rental installments.

    More recent product developments, however, have had stamp duty and capital gains tax implications, and have looked to the Islamic principles of Ijara (lease) or Murabaha (sale with profit) where the financial institution enters into a virtual rent to buy arrangement with the buyer over a specified time frame.

    Mr Murphy states: This means that every rental payment the customer makes will increase their equity in the property and subsequently decrease the provider’s equity. Once the customer has fully repaid the amount, there’s no actual transfer of title involved and this addresses tax implications.

    “Islamic finance is largely about the philosophical side of things- it’s where Western banking meets Islamic banking. We offer an alternative solution for Muslims in an Australian landscape.”

    “Ours is a common mortgage transaction that’s fully functional. It has all the bells and whistles of a traditional banking facility, such as an offset with a debit card attached to it and the ability to transact over the internet, but the main difference is that although we refer to capital, we don’t express principal and interest. Rather, we charge a rental facility fee.”

    “In a highly regulated environment you have to be pragmatic about what you can, and can’t offer. When people have English as a second language, you have to place yourself on the moral high ground, as people often misunderstand what they’ve been told, so National Consumer Credit obligations aside, we’re very careful to disclose all the costs involved.”

    Therefore the fundamental difference between a typical home loan and a Sharia-compliant home loan is underpinned by the borrowing terms (i.e. interest with a typical home loan, and rental or profit fee with an Islamic home loan)."