Why Islamic home financing is a safer and smarter way to finance your home

Buying a home is an exciting life milestone and can be a great investment. But it can also be a stressful undertaking with significant implications if not planned well.

Apart from the task of finding that perfect space and the complex purchase process involving real estate agents, banks and stacks of paperwork, you also have to consider the long-term scenarios and potential financial risks involved when buying your dream home.

From developments not being delivered on time to unforeseen expenses, or God forbid, becoming unemployed in a downturn or even dealing with a natural disaster – most of us likely know at least one person who hasn't seen their property investment pan out the way they dreamed.

In such circumstances, the type of financing you chose for the property can make all the difference.

What is Islamic home financing and how is it different than conventional financing?

Islamic home financing is an alternative product that looks and feels exactly like a traditional home financing. But ethically and equitably, Islamic home financing is superior.

Islamic home financing works differently than traditional loans because Islamic financial institutions are not permitted to charge interest, in order to protect people from exploitation and to help build financially healthy societies.

Unlike in a conventional lender-borrower relationship, both parties in Islamic home financing are beneficiaries and therefore, the risk and losses are not completely burdened on the customer.

Based on this structure, the key difference lies in how the bank behaves when things go wrong or don't go according to plan, in which case Islamic financing offers several protections for the homeowner.

How it works

Islamic home financing functions much like a rent-to-own home purchase plan.

The bank buys the home from the seller and becomes the legal owner.

Instead of selling the property to you, the bank leases it to you for an agreed period, and your monthly payments function as rent, with a portion of the amount contributing towards the purchase price of the property.

When you have made enough payments to match the purchase price, the bank transfers the property to you.

Additionally, as you continue buy out the bank’s stake, your rent liability decreases over time.

Shared risk

The biggest benefit of Islamic home financing is that you don't continue to pay instalments if the property remains incomplete.

It is only natural that economic cycles fluctuate during the long tenure period of a 25 year mortgage.

In down cycles, if construction on a project goes on hold or the project is not developed, you don't pay any instalments, which would not be the case with a traditional loan.

The same applies in case of unfortunate occurrences such as fires. In such an instance, a homeowner would not need to pay instalments during the repair period, which eases the burden of paying for alternate accommodation.

Ultimately, the bank shares both in the responsibility and risk with a customer, making Islamic home financing a great ethical and less risky alternative to a traditional home loan.

Islamic home financing is available to followers of any faith who are interested in a more transparent and ethical system of finance.

Dubai Land Department and other relevant government fees remain the same for your transaction irrespective of whether you use Islamic or conventional home financing.