Interest-free, but not without charges: Islamic mortgages hit the Canadian housing market
Financial products are being adapted to match the unique needs of many Muslims
By Anis Heydari
CBC News
Published on www.cbc.ca on December 21, 2022
Zuhair Naqvi and a colleague work in the offices of Islamic mortgage provider Eqraz, in Oakville, Ont. (Doug Husby/CBC)
For Abdullah Mohiuddin, getting into the housing market involves more than just locating the right home for the right price.
Like many other Muslims, Mohiuddin's religious beliefs include restrictions on paying and receiving interest. Given that a typical Canadian mortgage includes interest charges, this has added an additional challenge to his quest to stop renting and move into a house he owns.
"Even if the interest is very low, even if the interest rate is like 0.1 per cent, if it's more than zero per cent, then we cannot deal with conventional banks," said Mohiuddin.
While he has been searching for months, new options have begun to emerge in the Canadian mortgage market that could suit Mohiuddin's needs.
Abdullah Mohiuddin can't buy a house in Edmonton until he can locate a religiously appropriate mortgage.(Peter Evans/CBC)
Several companies in various Canadian provinces are slowly beginning to offer Islamic, or "halal" mortgages. Halal is an Arabic term that translates to "permitted" or "allowed" in English. These mortgages are deliberately structured to adhere to both Canadian law and the belief systems of many Muslims.
No interest, but you still pay
Financial products that avoid "riba," or interest, are not free of charge just because they are free of finance charges.
Muslims looking for a halal mortgage are still going to be paying carrying costs to a financial institution for a loan to purchase their home.
"When people in Canada, in the United States heard that Islamic finance forbids interest, we in the West automatically assumed that money was for free," explained Walid Hejazi, associate professor of economic analysis and policy at the University of Toronto's Rotman School of Management.
That is not the case, says Hejazi, whose research has focused on Islamic finance products.
"People that get Islamic mortgages still pay a comparable amount that you would pay if you got a conventional mortgage. It's just that the structure of these mortgages are different," he said.
Walid Hejazi is an expert in Islamic finance at the University of Toronto, and points out that interest-free mortgages are not free of charges. (Chris Mulligan/CBC)
According to halal mortgage providers, structural differences can include the source of the loaned money, as well as legal differences. Some mortgages more closely resemble a "rent-to-own" system, where the mortgage provider is also an owner of the home. There are also legal structures where fees are charged instead of standard interest payments.
Even though halal mortgages still end up costing money just like a conventional mortgage, the way those charges are structured makes a big difference, according to experts such as Hejazi.
"Many people will look at Islamic finance and say, instead of paying interest, you're paying profits, so really it's the same thing. And I think that's disingenuous. … How you get to the outcome really matters, and there's many, many religions where this is the case," he said.
Harder to source money — so they're often more expensive
Companies such as Oakville, Ont.-based Eqraz are just beginning to offer halal mortgages. Founder Zuhair Naqvi said with almost no marketing, his company is already seeing high demand.
Naqvi immigrated to Canada from Qatar in 2020, but had been working on launching Islamic financing in Canada for years before that.
"Canada is about 20 years behind on Islamic finance compared to other developed countries like the U.S. and U.K.," said Naqvi.
Zuhair Naqvi is the founder of Eqraz, an Islamic mortgage provider in Ontario. (James Dunne/CBC)
As the market for Islamic finance is less developed in Canada, Naqvi said, finding halal and religiously acceptable sources of funding to lend out for mortgages has been difficult. This can mean costs are higher as funds are more scarce.
On top of this, there are additional administrative costs that must be spread across a smaller client base.
"We have to add a 1.5 per cent margin to cover our costs, so effectively, that makes our mortgage about four per cent more expensive than the RBC or Scotiabank five-year mortgage, as an example," he said.
Higher risk for now, but that could change
The Edmonton-based Canadian Halal Financial Corporation is also offering halal mortgages. Co-founder Thomas Lukaszuk pointed out that the risk can be higher to lenders.
According to Lukaszuk, his company cannot foreclose on a home due to Islamic restrictions. This can mean higher charges to mitigate that financial chance.
"The risk is higher, hence the cost is higher ... and we're also dealing with a much smaller critical mass," said Lukaszuk.
That critical mass of customers is smaller but it's not unsubstantial.
According to Statistics Canada, out of more than 1.7 million Muslims, more than 800,000 live in a "tenant-occupied dwelling" rather than owning the home they live in.
For companies like Canadian Halal Financial Corporation or Eqraz, that represents a sizable target market.
Naqvi believes costs will go down as the business of halal mortgages grows, because to him, a larger pool of customers means a lower risk of default for lenders.
"With time, the bank and whoever funds Eqraz, or other Islamic companies, they will realize that the risk is not as high as they are calculating it to be, and the cost of the funding will therefore go down," said Naqvi.
Established structures are still difficult to get through
Both Lukaszuk and Naqvi pointed out challenges around regulation and insurance in Canada.
Many mortgage insurance providers do not insure Islamic mortgages as a rule, because the legal structures can be different depending on the provider.
While a 2010 report for the Canada Mortgage and Housing Corporation said Islamic financial products should not "present any particular difficulties" under Canadian accounting standards, years later they are still far from widespread and there are legal issues that come into play such as who is registered on land titles, and whether a rent-to-own contract is subject to landlord and tenant legislation in various provinces.
Hundreds of thousands of Muslims are renters, according to Statistics Canada, and those who wish to move from renting to owning are the target market for halal mortgage companies such as Eqraz. (Ben Nelms/CBC)
"Another big challenge within Canada is the regulatory environment makes it more difficult to issue an Islamic mortgage relative to a conventional mortgage," confirmed Hejazi.
Breaking into Canada's financial circles presented yet another challenge for Naqvi.
"It was a people challenge as an outsider, as a new entrant to Canada, as a Muslim, to break into the circles of Bay Street in Toronto," explained Naqvi.
"It took me more than two years to get the trust and acceptance of the people that are there," he said.
Mohiuddin is ramping up his search for a home, now that there are more Islamic mortgage providers in Canada. (Peter Evans/CBC)
The Islamic mortgage market is developed enough, however, for Mohiuddin to prepare to enter the market himself. With several Islamic mortgage providers across the country, he's more comfortable financing a home.
"I think I'm already looking at the houses in the market and if there is an opportunity, I think I will be putting out offers in a month or so," said Mohiuddin.
ABOUT THE AUTHOR
Anis Heydari
Senior Reporter
Anis Heydari is a senior business reporter at CBC News. Prior to that, he was on the founding team of CBC Radio's "The Cost of Living" and has also reported for NPR's "The Indicator from Planet Money." He's lived and worked in Edmonton, Edinburgh, southwestern Ontario and Toronto, and is currently based in Calgary. Email him at anis@cbc.ca.
