No interest, but not without fees: Islamic mortgages hit the Canadian housing market | CBC News

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For Abdullah Mohiuddin, entering the property market involves more than just finding the right house at the right price.

Like many other Muslims, Mohiuddin’s religious beliefs include restrictions on paying and receiving interest. Since a typical Canadian mortgage includes interest charges, this has added an additional challenge to his quest to stop renting and move into a home he owns.

“Even if the interest is very low, even if the interest rate is 0.1 percent, if it is more than zero percent, then we cannot deal with conventional banks,” Mohiuddin said.

As he has been searching for months, new options have begun to emerge in the Canadian mortgage market that could meet Mohiuddin’s needs.

Abdullah Mohiuddin can’t buy a house in Edmonton until he finds a religiously appropriate mortgage. (Peter Evans/CBC)

Several companies in various Canadian provinces are slowly beginning to offer Islamic or “halal” mortgages. Halal is an Arabic term that translates to “allowed” or “allowed” in English. These mortgages are deliberately structured to adhere to both Canadian law and the belief systems of many Muslims.

No interest, but you still pay

Financial products that avoid “riba,” or interest, are not free just because they are free of finance charges.

Muslims seeking a halal mortgage will still pay maintenance costs to a financial institution for a loan to buy their home.

“When people in Canada, in the United States heard that Islamic finance forbids interest, in the West we automatically assumed that money was free,” explained Walid Hejazi, associate professor of economic and political analysis at the Rotman School of Management at the University of Toronto. .

That’s not the case, says Hejazi, whose research has focused on Islamic financial products.

“People who get Islamic mortgages still pay an amount comparable to what they would pay if they had a conventional mortgage. It’s just that the structure of these mortgages is different,” he said.

A university professor is sitting at his desk for an interview.
Walid Hejazi, an expert in Islamic finance at the University of Toronto, points out that interest-free mortgages are not cost-free. (Chris Mulligan/CBC)

According to halal mortgage providers, structural differences can include the source of the money borrowed, as well as legal differences. Some mortgages are more like a “rent to own” system, where the mortgage provider is also the homeowner. There are also legal structures in which fees are charged instead of standard interest payments.

Although halal mortgages end up costing you money like a conventional mortgage, the way those fees are structured makes a big difference, according to experts like Hejazi.

“A lot of people will look at Islamic finance and say, instead of paying interest, you’re paying profit, so it’s really the same thing. And I think that’s false… How you get to the bottom line really matters, and there are many , many religions where this is the case,” he said.

Harder to get money for, so often more expensive

Companies like Oakville, Ontario-based Eqraz are just starting to offer halal mortgages. Founder Zuhair Naqvi said with almost no marketing, his company is already experiencing high demand.

Naqvi immigrated to Canada from Qatar in 2020, but had been working on launching Islamic finance in Canada for years before that.

“Canada is about 20 years behind in Islamic finance compared to other developed countries like the United States and the United Kingdom,” Naqvi said.

A man wearing black plastic-rimmed glasses looks into the camera, next to a sign that reads
Zuhair Naqvi is the founder of Eqraz, an Islamic mortgage provider in Ontario. (James Dunne/CBC)

Since the market for Islamic finance is less developed in Canada, Naqvi said, it has been difficult to find halal and religiously acceptable funding sources to provide home loans. This can mean that costs are higher since funds are more scarce.

On top of this, there are additional administrative costs that need to be spread across a smaller customer base.

“We have to add a margin of 1.5 per cent to cover our costs, so effectively that it makes our mortgage about four per cent more expensive than the five-year mortgage from RBC or Scotiabank, for example,” he said.

Higher risk for now, but that could change

The Edmonton-based Canadian Halal Financial Corporation also offers halal mortgages. Co-founder Thomas Lukaszuk noted that the risk may be higher for lenders.

According to Lukaszuk, his company cannot foreclose on a house due to Islamic restrictions. This may mean higher charges to mitigate that financial possibility.

“The risk is higher, therefore the cost is higher … and we are also dealing with a much smaller critical mass,” Lukaszuk said.

That critical mass of customers is smaller but it’s not negligible.

According to Statistics Canada, of the more than 1.7 million Muslims, more than 800,000 live in “tenant-occupied housing” rather than owning the home in which they live.

For companies like the Canadian Halal Financial Corporation or Eqraz, that represents a sizeable target market.

Naqvi believes that costs will decline as the halal mortgage business grows, because to him, a larger pool of clients means lower default risk for lenders.

“Over time, the bank and whoever finances Eqraz or other Islamic companies will realize that the risk is not as high as they calculate and therefore the cost of financing will decrease,” Naqvi said.

Established structures remain difficult to traverse

Both Lukaszuk and Naqvi pointed to challenges around regulation and insurance in Canada.

Many mortgage insurance providers do not insure Islamic mortgages as a rule, because the legal structures can be different depending on the provider.

While a 2010 report by the Canada Mortgage and Housing Corporation said Islamic financial products should “present no particular difficulty” under Canadian accounting standards, years later they are still far from widespread and there are legal issues at stake. game, like who is registered. on property titles, and whether a rent-to-own agreement is subject to landlord-tenant law in various provinces.

Hundreds of thousands of Muslims are renters, according to Statistics Canada, and those who want to move from renting to owning are the target market for halal mortgage companies like Eqraz. (Ben Nelms/CBC)

“Another big challenge within Canada is that the regulatory environment makes it more difficult to issue an Islamic mortgage relative to a conventional mortgage,” confirmed Hejazi.

Breaking into Canadian financial circles presented another challenge for Naqvi.

“It was a challenge for people as an outsider, as a newcomer to Canada, as a Muslim, to break into the circles on Bay Street in Toronto,” Naqvi explained.

“It took me more than two years to get the trust and acceptance of the people who are there,” he said.

A man searches real estate listings on his computer.
Mohiuddin is speeding up his home search now that there are more Islamic mortgage providers in Canada. (Peter Evans/CBC)

However, the Islamic mortgage market is developed enough that Mohiuddin is preparing to enter the market himself. With several Islamic mortgage providers across the country, he feels more comfortable financing a home.

“I think I’m already looking at the houses on the market and if there’s an opportunity, I think I’ll put offers in a month or so,” Mohiuddin said.

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