Islamic sharia finance is a way to finance property and stay sharia compliant at the same time. Basically, a person buying any property will be able to pay for it in installments to a trust. Islamic ijara financing has many advantages.
Here are a few points to consider:
- People get to buy a home and finance it in accordance with their religious beliefs. You can steer clear from riba with this program. This is an Islamic concept that translates into exploitation made in business or trade. Generally, it forbids interest on a loan or deposit. Islamic banking has several different ways to bypass any financial transactions that charge this interest.
- There are tax breaks that are identical to those for homes purchased with more conventional mortgages in North America. For example, the tax code in America allows for interest deductions that you pay on a mortgage, property taxes and some other expenses. Getting an Ijara product means you will get the same deductions.
- Unlike rent rates, islamic sharia finance includes payments that don’t increase or spike. In fact, the cost of owning a new home decreases over time even when other costs like insurance and property taxes go up. It’s another way these sharia compliant loans work like their more traditional counterparts.
Lease to Own is one of the big ideas behind these sharia compliant mortgages. In fact, the word Ijara translates into rent. Here’s how this process works for residential properties in Canada.
Generally, these apply to 1 to 4 units that are owner occupied. The lease terms for these sharia compliant mortgages can be up to 25 years. Similar to the traditional mortgage system, there is a down payment of 5% minimum in certain circumstances.
The amount of the loan is comparable to conventional mortgages. Most investors interested in this type of islamic ijara financing stay within the $100,000 range and up to $2 million in some cases. Many of these financial institutions offer terms from 1 to 5 years and private investor financing is available.
It’s important to remember sharia compliant mortgages share some other similarities with standard mortgages. For example, they are known as full documentation loans and you’ll need to have certain documents at the ready.
Verification of income and employment are two of the most important requirements. It’s a good idea to have an employment history that shows you are steady and reliable. Quite often, this means being at the same job for a number of years.
You’ll need to verify your assets, as well as bank account details and any large deposits. Although the product you are applying for is sharia compliant, you’ll be expected to establish your credibility using these metrics.
You must verify your credit score when you are applying for this type of islamic sharia finance. For the most part, you are required to have a minimum score of 640 to qualify for an Ijara transaction.