Taking a home loan is something that most new, or old, home owners will turn to when it comes to financing a new purchase, especially when that purchase happens to be a house. There are various banks in Malaysia that provide home loans to their customers, many of which are the conventional home loans where an amount is sanctioned and is paid back in monthly instalments with an interest charged on the amount borrowed. But what happens when some is particular about their financial products and is looking for a home loan that follows the principals of Islamic banking? In such cases, there are banks that provide home loans to those who wish to use products of Islamic financing.
What is an Islamic Home Loan?
Islamic home loans are home loans that are built on various concepts of Islamic banking. The basic principal of Islamic home loans is that with these loans, the bank effectively buys what the customer wants and sells it back to them for a profit. This can be compared to the concept of hire purchase where a bank will purchase the house on the customer’s behalf and give it to them to use. They will then pay a monthly instalment to the bank for a fixed period of time to pay back the amount borrowed. Once the amount is paid back, the bank will turn the house over to the customers and the property will be considered as a paid for. The biggest distinguishing feature of an Islamic home loan is that there are no interest rates charged in this type of a loan. There is instead a profit rate charged that determines the profit the bank will make from the transaction.
Concepts of Islamic Home Loans
The Islamic home loans provided by various banks follow different concepts that work on principals like hire purchase. Some of these concepts are:
This is a concept which works through a lease based on a diminishing partnership basis. It can be applied for by anyone in Malaysia and offers a discount on the stamp duty that is to be paid for the contract. It can be taken to purchase a new property or to re-finance an existing one. It can also be taken when you need supplementary finance to refurnish a house or purchase a vacant lot.
The concept of Ijarah works in the principal of hire purchase where the bank will purchase the property in question. It will then provide the property to the customer at a profit rate which will determine the banks profit for providing the service. The loan is paid back over a fixed period of time through monthly payments and once it is paid for, the bank will either gift it to the customer or sell it to them for nominal price. Till such time as the loan is running, the house is actually owned by the bank and the ownership is actually handed over to the customer only after the loan is paid. There are two types of loans that can be taken under this concept.
- Ijarah Thumma Al-Bai': This is meant to provide financing for properties that are already constructed.
- Ijarah Mawsufah Fi Al-Zimmah: This loan is meant for properties that are still under construction.
Interest rates on Islamic Home Loans
The concept of charging interest is not present in Islamic banking, therefore these loans charge something known as a profit rate. It is also charged as a percentage and is linked to the Base Financing Rate of the bank. For example, if a bank says that the profit rate is BFR – (minus) 2% and the BFR is 6%, then the profit rate will be 4%. The profit rate and the BFR can change from time to time so it is always best to confirm them with a bank, before applying for a loan.
Top banks providing Islamic Home Loans
- Hong Leong Islamic Bank Home Loan
- AmBank Home Loan
- Bank Islam Home Loan
- Maybank Home Loan
The home loans offered by this bank can come with repayment tenures of up to 35 years and feature floating profit rates. They also feature 20% discounts on stamp duties and can be taken for both residential and commercial properties. The loan can also be prepaid and rebates made available to customers.
The home loan offered by this bank follows the Musharakah Mutanaqisah concept of the Shariah law. It offers up to 95% financing for the property along with the option of choosing a fixed or variable profit rate. This loan too can be taken for a period of either 35 years or till such time as the borrower turns 75 years of age.
This loan too comes with a repayment period of up to 35 years and offers up to 90% financing. The financing can include cover for Takaful for the house as well as the mortgage along with the payment of stamp duty, valuation fee and any legal fee.
This is a loan that can offer up to 100% of financing and offers discounts on stamp duty due on the loan contracts. It can also be used to either purchase constructed houses or buy vacant lands. If you choose to go in for an early settlement, the bank does not charge a fee and offers competitive profit rates.