How is an Islamic Mortgage Different from Conventional Mortgage?
A mortgage is a loan taken out to buy a property or land. The loan is secured against the value of your home or land, which means that if you fail to keep up your repayments, the lender could force you to sell your home or land to get their money back. When you go out in the market for a mortgage, you generally come across only one way: the conventional one. But in Islamic states like the UAE, you get to see the lenders offering you more than one mortgage service. In this blog, we’ll help you go through the two broadly known mortgage services in Dubai: Conventional Mortgages and Islamic Mortgages, and what makes Islamic Home Financing in Dubai more viable. So let’s get started without further ado!
Defining Conventional Mortgages
Conventional mortgages are the more common type of mortgage in Dubai and worldwide, and most banks and financial institutions offer such mortgages. Financial institutions and mortgage lenders lend money to buy new houses and charge specific interest for that loan. Conventional Mortgages consist of the principal amount or the amount borrowed and the interest rate, and you have to pay off the interest and principal amount within twenty-five years at max.
Defining Islamic Mortgages
An Islamic mortgage generally called a Shariah-compliant mortgage, is a type of mortgage that complies with the Shariah law. It works in a completely different way as Islamic financial laws prohibit charging interest. For Islamic financing or mortgages, several models exist, but Ijarah and Murabaha are two of the most commonly used models for Islamic Home Finance in Dubai.
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What Makes Them Different?
The general belief is that Islamic Mortgages are better than conventional mortgages as there are no interest rates, and it compels even the non-muslims to buy Islamic Mortgages in Dubai. But before you apply for Islamic Mortgage, let us help you understand what makes it different from a conventional mortgage.
Purchase & Lease Back Arrangement
The most significant difference is that the loan is not a debt with Islamic Mortgage. Instead, it is a partnership between the borrower and the lender, sharing the profits or losses of the property. This is helpful when you’re buying a property off-plan, as you don’t have to pay anything until the property completes.
No Interest Rates or Late Payments
Another significant difference between an Islamic and conventional mortgage is that there is no interest charged on Islamic loans. Instead, a profit rate is applied, which is calculated based on the value of the property at the time of sale. This is because a loan is supposed to be a helping hand from a person to aid another as a kind gesture of charity and the lender can only expect to receive the amount of money they lent out. The bank or the lender buys the property on your behalf and then resells it to you at a profit. The buyer or the customer then pays back to the bank in monthly installments.
Shorter Mortgage Terms
Finally, Islamic mortgages typically have a shorter term than conventional mortgages, with most being repaid over 5-7 years. This is because Shariah law prohibits the lending of money for longer periods.
Conclusion
If you’re considering taking out a mortgage in Dubai, it’s important to compare the different types of mortgages on offer and choose the one that best suits your needs. If you don’t want to pay the interest and can afford to pay back the mortgage amount in 6-7 years, you go for Islamic Home Finance in Dubai. Islam prohibits buying or selling anything that has zero-intrinsic value. And since loans are paying more money to get money and money contains a zero-intrinsic value, you cannot purchase it. Therefore, the Islamic banks only serve the public’s interest and work on making halal economic growth that meets the Sharia laws.