Fact or Myth? Islamic Finance is More Expensive than Conventional Home Loans

diagram of housing risks

There is a belief that Islamic finance is more expensive than conventional home loans, and in the past, this once held true. Islamic financing, however, has been relegated to a myth in recent years as it has become relatively cheaper.

Many just don’t understand or know enough about Islamic finance to reach such a conclusion. Here are three key points that highlight the cost effective nature of Islamic home finance and disprove the myth that it is more expensive than conventional home loans.

  • Islamic financing prohibits riba or interest

In Shariah-compliant home financing, the home buyer does not pay riba or interest to the finance company as he or she does when financing with a conventional home loan. Thus, in the event of a default, Shariah-compliant home financing agreements protect the buyer from having to pay compounded interest that results in a price greater than the original sale price of the house.

  • Islamic financing does not compound late payment or pre-payment fees

Islamic finance providers aim to keep the entire home financing process Shariah-compliant, and therefore, will not compound late payment fees like conventional home loan providers. Instead, they charge a fixed fee that covers the late payment fee expense and does not serve as a means for profit. Additionally, conventional home loan providers often charge are a pre-payment penalty to buyers who want to pay ahead of the agreed timelines, while Islamic finance providers do not.

  • Islamic financing shares the risk with the buyer

One of the unique components of Islamic finance is the co-owner or partner program. Murabahah, Musharakah and Ijararah are types of co-owner or partner programs that offer riba-free financing. In these programs, Islamic financing providers share the risks with the buyer since they do act as a co-owner or partner, and in the case of a foreclosure, Islamic financing providers do not receive more than the sale price of the house. Conventional home loan providers do not share the risk of natural disasters, eminent domain or foreclosure. Through this type of financing, the home buyer bears the brunt if any of these misfortunes occur.

Islamic financing has evolved to become an option that is competitively compared to conventional home financing. The good news, is that it’s an affordable option for those who wish to achieve homeownership without compromising their beliefs.

Islamic finance can be confusing due to its complexity, but with the right research, it’s clear that is not more expensive than conventional home loans. The key takeaway should be to always do research before moving forward with any home financing provider so that you are prepared to make the best decision that aligns with your values and accomplishes your goals.