Why some people pay more to avoid convential home loans

Wildan Al Hazmi said he chose Islamic financing for "peace of mind". (Supplied) Link copiedShareShare articleWhen Wildan Al Hazmi decided to buy an investment property several years ago he did not even consider a conventional loan. Instead, he opted for a niche option that caters to a growing segment of Australia's population. Mr Al Hazmi, a father of two in Melbourne, said he took out Islamic financing because of his Muslim faith. Borrowers do not need be Muslim to access Islamic financing, but in Australia it is rarely the cheaper option. So how does Islamic financing actually work? How is it different from traditional loans? And if it is not cheaper why do people choose it? Euis Amalia, the professor of Islamic economics at Universitas Islam Negeri (UIN) Syarif Hidayatullah Jakarta, said Islamic transactions prohibited three things: riba (interest), gharar (speculative transaction), and maisyir (gambling activity). She said interest was considered "unjust and exploitative" because it created an imbalance between capital owners and borrowers, placing the most risk on the borrowers. Professor Amalia said, generally speaking, conventional banking primarily focused on profit generation while the Islamic economics system also "prioritises human and environmental welfare". Professor Euis Amalia said a popular Islamic financing structure was "Murabaha" or "risk sharing". (Supplied) She said all financial transactions involved must be halal, meaning they cannot be linked to prohibited activities that bring more harm than good for society or the environment. This means those institutions are forbidden from investing in certain industries including gambling, alcohol and pornography. In the context of mortgages, transactions in Islamic finance must be based on a clear deal between the buyer and the seller, Professor Amalia said. "Islamic finance is governed by ethical principles like prohibiting exploitation and speculation, as well as income derived from such activities," she said. Professor Amalia said one popular Islamic financing structure was "Murabaha" or "risk sharing" where an Islamic finance service buys an asset — such as a house — and resells it to a buyer with a marked-up profit. The "profit rate" is benchmarked to market interest rates. Similar to conventional banking, Islamic financing includes fixed rate and variable rate schemes. If the mark-up is fixed, any decisions by the Reserve Bank of Australia to raise the cash rate would not affect the repayments once the contract is signed. The buyer would pay the financier in fixed instalments over an agreed duration, up to a decade, similar to the idea of a fixed rate in conventional banking. Islam is not the only religious tradition to have raised serious concerns about the ethics of interest, but Muslims have continued to debate the issue with vigour. According to MCCA Islamic Finance and Investments, a provider of Islamic financing, while the Reserve Bank of Australia "does not directly regulate Islamic finance products, its policies influence the overall economic conditions in which these products are offered." "For instance, changes in the cash rate can affect the cost of borrowing for Islamic finance contracts," its website said. While a Murabaha agreement and a fixed-term loan can look similar, experts argue they are built on different structures. Salaam is a Sydney-based company that provides home financing in compliance with Islamic principles. "Interest is charged on lending money, while the profit rate is the agreed return from a sales contract under a real asset," said Mas Johan Harris, the head of investment and product at Salaam. Mas Johan Harris said the limited Islamic finance market in Australia had affected its affordability. (Supplied) Another common Islamic financing structure is Ijarah Muntahia Bittamleek or the "shared ownership model". This is a structure in which the Islamic financier and the home owner jointly purchase the property, and the home owner then pays monthly rent, plus a profit margin, to the financier for the share they own. Eventually the property is paid off and the homebuyer owns the property outright, similar to shared equity schemes. This is the structure that Mr Al Hazmi used when he bought his two-bedroom investment property in Thuringowa, in Central Queensland. Mr Al Hazmi bought this house in 2024. (Supplied) He bought the house for $486,500 in 2023 and took out a 30-year variable rate instalment plan. He pays around $2,500 every month including a "profit rate". At the end of the 30 years, Mr Al Hazmi would have paid about $1 million for the property. Since Australian property and tax laws are designed around conventional mortgages, Islamic finance providers may offer different legal structures to avoid extra costs like double stamp duty. For example, Mr Al Hazmi's name is on the title of his investment property, but he has a separate contract with his Islamic finance institu

Why some people pay more to avoid convential home loans

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Why some people pay more to avoid convential home loans

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