Why Are Halal Mortgages More Expensive Than Riba-Based Mortgages?

 Are halal mortgages more expensive than their riba-based counterparts? If so, what is the cause? These are common and sensitive questions asked by customers of halal home loans in Santa Ana. If a halal mortgage is costlier, how can it be considered halal? It should be cheaper if not free. Maybe mortgage firms are simply gouging their clients. The answers to these questions can only be contemplated if you have a thorough understanding of everything that makes a mortgage halal and explore why the expenses are higher.

Understanding Halal Mortgages

The price of a halal mortgage is independent of whether the mortgage is halal or haram. Halal mortgages must follow a Shariah-compliant structure, which is usually based on Murabaha, Musharaka, or Ijara. These structures avoid riba or interest, allowing the lender to earn a halal profit paid by the customer. There are no restrictions associated with the amount or rate of profit charged.

The Cost of Halal Mortgages

So, what is the reason behind the high cost of a halal mortgage? Certain mortgage firms charge a profit rate of about 8.24%, compared to the posted rate of RBC Bank, which is 6.39%. The discounted rate of this financial institution is around 4.74%, but it is available to everyone. The difference of 2% arises from a few key factors.

1. Low Supply of Halal Capital

As opposed to conventional lenders, lenders of halal home loans in Santa Ana lack access to low-cost riba-based capital. The market of riba-based market is well-established and perceived as low-risk and high-volume. Conversely, the halal mortgage industry is small, with most institutions refusing to fund halal providers due to strategic priorities and biases against the followers of Islam.

2. Wakala Structure Risks for Lenders

Halal mortgage lenders utilize Shariah-compliant Wakala agreements for funding. These agreements involve more risk for the lender or lending institution compared to standard loans. This higher risk requires lenders to ask for a risk premium in the Wakala profit.

Also Read: Can You Get an FHA Loan for a Second Home?

3. Shariah-Related Operational Costs

Being Shariah-compliant is operationally expensive for lenders. To ensure compliance with the state, federal, and Shariah laws, mortgage establishments meticulously manage each transaction and maintain extensive records. The Shariah Board audits the mortgage products offered by these lenders, as well as their processes and interactions with third-party vendors and partners.

4. Comparing Other Halal Lenders

You might encounter a few so-called “halal” lenders offering Diminishing Musharaka mortgages at cheaper rates. Then again, due to the problems between the federal and state laws and Shariah law, the Diminishing Musharaka products offered are usually impure, replicating a riba mortgage. By opting for such a mortgage, a customer may end up with all the house pricing risks and TMI risks. These lenders cannot access genuine halal mortgage capital at scale. Even if they are cheaper, there is a high possibility of it being haram or non-compliant with the laws of the state or country.

Still Worthwhile

At the moment, the best providers of halal home loans in Santa Ana are focused on supporting customers in securing halal homes before the prices increase. As the volume experienced by these agencies increases, there is a chance that financing will get cheaper.