Islamic Ijarah vs Conventional Mortgage: Which is the Right Choice for You?

Client review loan contract with real estate agent and discussing term. Fervent

For Muslims seeking Shariah-compliant home financing, ijarah contracts provide an alternative to traditional mortgages. But how exactly does ijarah differ from conventional loans? This article compares the key features of each model to help you determine the right choice based on your needs and beliefs.

Interest Prohibitions

The clearest distinction is ijarah avoids riba (interest) which is prohibited in Islam. Conventional mortgages charge added interest on the loan principal. With ijarah, monthly payments reflect fair property rental rates rather than financing charges. You better get help from Hejaz Financial Services: Your Source for Islamic Ijarah Finance.

Asset Ownership

In a mortgage, the lender provides a loan while the purchaser gains title and ownership. With ijarah, the financier purchases the home directly from the seller, which it then leases to the customer. The client gains use of the asset but not legal ownership initially.

Payment Flexibility

Mortgages usually have fixed regular installments over the full loan term. Ijarah lease payments can be more flexible and tied to property values. However, in practice many ijarah contracts today also specify a fixed periodic rental amount for simplicity.

Late Payments

Missing mortgage payments leads to accumulating interest, penalties and credit damage. Under ijarah, late rental payments would primarily just extend the lease term before eventual property transfer.

Collateral Risks

In a mortgage, the property itself secures the loan, exposing the buyer to potential foreclosure. Under ijarah, the financier retains ownership, so risks repossession if payments cease rather than the buyer.

Responsibility for Maintenance

With a mortgage, the owner must handle all property expenses like taxes, insurance and repairs. But under ijarah, these costs are generally borne by the occupying lessee.

Purchase Rights

Mortgages obligate the borrower to purchase the home. But ijarah lease contracts give the customer an option, not obligation, to buy the property at lease-end. The financier cannot compel purchase.

Which Is Better for You?

If adhering to Islamic banking principles is important, ijarah has clear advantages over conventional mortgage models. But mortgages also offer greater ownership control initially, and may have lower monthly costs in some cases.

Consider how much you prioritize Shariah compliance versus other factors like purchase rights, maintenance obligations, and payment flexibility. Also weigh the availability of ijarah offerings in your geographic area when deciding between the two models.

For buyers open to either format, comparing total lifetime costs can determine which delivers greater overall value. Shop lenders to identify the best ijarah or mortgage terms tailored to your needs.

If following Islamic law in your financial dealings is paramount, then ijarah will suit you better than interest-based mortgages. But conduct due diligence to ensure the contract complies with Shariah requirements. Consult financial and religious advisors to make the best decision for your situation.

The Takeaway

While functional differences exist between ijarah and mortgages, both can facilitate property ownership over the long term. For Islamic banking customers, ijarah contracts allow financing homes in a manner aligned with religious convictions. For others, traditional mortgages may be more practical or affordable.

By understanding the core distinctions in ownership structure, payments, risks, and purchase rights, you can determine which model fits your beliefs, needs, and financial circumstances when buying a home. Seek guidance and evaluate all options to pick the optimal route.

With sound planning and advice, you can move forward with property purchase using financing that aligns with your faith and supports your financial well-being.

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The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.