Moneyadviceblog » Loans » The Basics of Halal Mortgage in Canada

Halal financing used to be a vastly alien concept in most of the Western world – yet with more and more people in Europe and North America identifying as Muslim, Shariah practices are becoming more widely accepted. Halal mortgages in Canada are a prime example, providing Muslims across the country with a competitive alternative to a conventional mortgage.

How so? To understand this, we need to first look at how the Islamic financial system works, in particular loans. In Islam, a loan is meant to be a charitable arrangement — a way for one person to help another who is experiencing hardship. It’s a noble act, and it requires that the borrower only pay back what they borrowed and the lender to only expect the exact amount that was lent. A loan is not a way to earn money.

It’s important to consider that usury is forbidden under Sharia (Islamic Law). In other words, you can’t lend someone a sum of money and expect a greater sum in return – meaning that asking for interest is forbidden. There are naysayers that claim this is an unsustainable business model, but that is a conversation for another time. Suffice it to say that the absence of interest is the biggest difference between a Halal mortgage and a conventional one, and allows devout Muslim Canadians to fulfill their dreams of homeownership without compromising on their beliefs.

How do Islamic mortgages work?

Just like buying a home with a regular mortgage, you will enter a contract with the seller and agree on a price. Your Islamic mortgage provider will then buy the property from the seller with a deposit paid by you of between 5% and 35%. With a standard mortgage, the money would be transferred to you to give to the seller, and you would then be required to pay it back with interest.

With an Islamic mortgage, the bank owns the property shares that it paid for, which is gradually transferred over to you as you pay off the bank’s investment. This is usually in fixed amounts at the end of each month until the whole amount is paid off. There are three types of Islamic home financing models that are fairly well-known in the West:

Halal Mortgage2

Musharakah is a form of co-ownership between the home buyer and the financing company. The two parties agree to invest in a property and buy the home together. In a version called Diminishing Musharakah, the home buyer gradually buys out the financier’s stake in the property, while paying a fee to use the part of the property still owned by the financier. This is the most common and authenticated form of Islamic home financing worldwide.

Ijara is basically a lease-to-own arrangement. The financier purchases the property and the home buyer rents it. A portion of each payment goes toward the tenant’s future ownership of the property. The home is not registered in the buyer’s name until repayment is complete.

Murabaha is a model in which the financier buys the home and sells it to the customer on a deferred basis at an agreed-upon profit. The customer pays a deposit and repays the financier over a period of time, including a profit charge with each payment. This is not a loan with interest — it is a resale with a deferred fee.

The last two models have significant drawbacks. In Ijara, the home buyer is basically a tenant for the entire period of the contract and does not enjoy the benefits of homeownership until repayment is complete. Meanwhile, Murabaha creates an obligation for the home buyer that resembles debt. Therefore, Diminishing Musharakah has been deemed by the most highly respected scholars in Islamic finance as the best option by far.


Islamic home financing is an ethical and equitable solution to financing needs. It is not limited to followers of any one faith; in fact, it appeals to all people who are interested in a more transparent and ethical system of finance as well. And Islamic home financing is an ideal solution for Muslim and non-Muslim families looking to buy a home in accordance with their values. What are your views on the subject? Feel free to share them in the comments below.