What is a halal mortgage? Here’s what you need to know about why Canada is considering them

Nearly five per cent of Canadians are Muslim, according to the latest 2021 census data — a proportion that has more than doubled since 2001.

Canada’s proposal to consider products like halal mortgages has already drawn criticism from the stringently secular Bloc Québécois, with MP Martin Champoux (Drummond) arguing in the House of Commons on Thursday, “Canada is a secular country. We are also partial to secularism. We are Quebecers. They are trying to pick a fight. It is the same old story.”

But what exactly are halal mortgages, how are they different from regular mortgages, and what could the federal government do? Here’s everything you need to know.

What is a halal mortgage?

Islam, like other Abrahamic religions, bans the practice of usury — charging excessively high rates of interest.

That has translated into a ban on interest in Islam, Walid Hejazi, a professor at U of T’s Rotman School of Management, explained to the Star. 

But, that doesn’t mean that halal mortgages are cheaper or provide some sort of advantage, Hejazi said. The end product is the same as a regular mortgage, it’s just that the process differs.

“The structure of the mortgage and the intent of the parties to the mortgage, is very different,” he said.

“In the times of the prophet, when you were charged interest, what ended up happening is people became enslaved,” which means for Islamic finance specifically, mortgage providers are not allowed to charge penalties Hejazi said. That’s usually circumvented by donating penalties to charity instead.

To get around the restrictions on interest, halal mortgages instead have the interest built in through fees or amortization. 

“The point is that it’s structured in a way that avoids interest, but does include profit,” Hejazi said.

What makes a mortgage halal?

Mohamad Sawwaf — co-founder and CEO of Manzil, a provider of halal mortgages — compared it to any other kind of halal product people use or consume. 

Halal mortgages, Sawwaf said, is like going to a steak house and ordering a halal steak. 

“If me and you sat in a steak house and I got a rib eye steak, you got a rib-eye steak. But mine was halal and yours wasn’t, we wouldn’t be able to tell the difference,” Sawwaf said.

“It is the process and the documentation within Islamic finance that makes (halal mortgages) compliant — the end product, the end pricing, that’s all the same,” he added.

Sawwaf’s company, Manzil, provides two types of halal mortgages — a murabaha model and a musharaka model.

The murabaha model is “akin to a rent-to-own model” of home financing, Sawwaf explained. Manzil purchases the home on behalf of a consumer and resells it back to them with an “embedded profit rate.”

“We haven’t lent any money, we bought the asset and we resold it at a higher amount because (the customer) wanted the convenience of paying (the mortgage) in installments.”

The musharaka model is “basically a shared equity mortgage, where we would come in as a partner with a client,” where Manzil buys in a portion of the mortgage and is paid back by the customer with an embedded profit amount to buy its shares over time.

What can the federal government do about halal mortgages?

While halal mortgages are already being offered, Sawwaf and Hejazi said the federal government needs to step in to level the playing field in terms of tax regulations.

“What’s happening is our community is actually paying more in tax, unnecessarily, because the laws are not adaptable to unique structures within the mortgage industry,” Sawwaf argued.

Halal mortgage customers aren’t eligible for the first time homebuyers credit, and are slapped with a doubled up land transfer taxes or capital gains tax throughout the process, he added.

Those barriers, Sawwaf said, deters the growth of the halal mortgage industry and is a barrier to more home ownership in Canada.

“When I was a kid, we used to go to the only halal butcher shop out in Mississauga, and they were priced higher because demand exceeded supply. It’s simple economics 101,” he added. “No different here, but if we’re looking at going mass market and penetrating the market on scale, you need to have competitive pricing.”

A large number of Muslim Canadians also exclude themselves from the banking system, as they look for more Islamic financing options, Sawwaf said. ”

“The government tax code, and even just legislation in general, needs to be inclusive to accommodate these minorities. Because what does that do? It creates loyalty, it creates patriotism,” Sawwaf argued. “We are further embedded within the Canadian fabric.”

”If I want a mortgage that is halal, if I want food that is halal, if I want food that is kosher — everybody should be allowed to pursue those because they’re completely consistent with the philosophy, and the values in Canada,” Hejazi concluded.