This is a common and sensitive question among customers: If halal mortgages are more expensive, how can they be considered halal? Shouldn’t they be cheaper or even free? Are halal mortgage companies simply gouging customers? The answer lies in understanding what makes a mortgage halal and exploring why the costs are higher.
Pricing is independent of whether a mortgage is halal or haram. A halal mortgage must follow a Shariah-compliant structure—typically based on Murabaha, Musharaka, or Ijara—that avoids riba (interest). These structures allow the lender to earn a halal profit, which the customer pays. Importantly, there are no restrictions on the amount or rate of profit charged.
So, why are halal mortgages more expensive? Let’s take EQRAZ as a case study. As of October 18, 2024, EQRAZ’s Murabaha profit rate is 8.24%, compared to RBC Bank’s posted rate of 6.39%. While RBC’s discounted rate is around 4.74%, it’s not available to everyone. The nearly 2% difference arises from several key factors:
Unlike conventional lenders like RBC, EQRAZ lacks access to low-cost riba-based capital. The riba-based mortgage market is well-established, perceived as low-risk, and high-volume. In contrast, the halal mortgage industry is tiny, with 99.99% of Canadian institutions refusing to fund halal providers due to strategic priorities and biases against Muslims. To our knowledge, EQRAZ is the only halal mortgage provider that has secured halal funding from a Canadian bank. This limited supply results in higher costs for EQRAZ.
EQRAZ utilizes Shariah-compliant Wakala agreements for funding, which involves more risk for lending institutions compared to standard loans. This higher risk leads lenders to require a risk premium in the Wakala profit.
Maintaining Shariah-compliance is operationally expensive. To ensure compliance with both Canadian and Shariah law, EQRAZ meticulously manages each transaction and maintains extensive records. Our Shariah Board audits not only our mortgage products and processes but also our interactions with third-party vendors and partners. Currently, EQRAZ collaborates with over 20 vendors, including HR consulting firms, lawyers, and mortgage servicers, all of which adds to our operational costs.
Some Canadian “halal” lenders in Canada are offering Diminishing Musharaka mortgages at a cheaper cost compared to EQRAZ. However, due to the problems between Canadian laws and Shariah-law, the Diminishing Musharakah products offered are often not pure, and replicate a riba-bearing mortgage, in which the customer ends up with all the house pricing risk and TMI risks. It is these malpractices that allow some Diminishing Musharaka providers to offer mortgages cheaper, by accessing riba-based capital. These lenders CANNOT access genuine halal mortgage capital at scale. So, while they are cheaper, they run a strong possibility of either not being halal or not being compliant with Canadian laws. This article reports how, in the UK, the tax authorities are imposing huge capital gains bills on unsuspecting customers that availed diminishing Musharaka mortgages from the UK Islamic Banks over the past two decades. This will most likely happen in Canada as well! Please refer to our blog on the problems with typical halal mortgage products here.
Currently, EQRAZ is focused on helping customers secure halal homes before prices rise again, which many forecasts suggest will happen. As our volume increases, we anticipate that financing will become cheaper. We recommend that customers take up a two-year renewable mortgage with us and lock in the home price now. While they may pay slightly more for 24 months, they will likely renew at much lower rates, leading to significant net savings as customers keep all the home equity gains.
Analysis indicates that even with higher payments for a halal mortgage, buying a home today will yield substantial equity gains compared to renting.
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Halal Mortgages