How Islamic home finance works in Australia

Video: general information only. Captions available.

What is riba, and why does Islamic finance avoid it?

Riba is the Arabic term for interest, or any increase charged for lending money for money. Islamic finance avoids it, along with excessive uncertainty (gharar). Instead of earning interest on a loan, the financier earns its return from a real asset, such as rent on a property, or from a partnership.

How does Ijarah Muntahia Bittamleek work?

Ijarah Muntahia Bittamleek means a lease that ends in ownership. "Ijaar" comes from the Arabic word for lease, reflecting the Ijarah (lease-to-own) structure our home finance uses.

Here's how it works:

1. The financier appoints you as its agent to buy the property.
2. You become the registered owner, and the financier holds a registered mortgage and a beneficial interest in the property.
3. You make monthly rental payments, either Principal and Rental or Rental Only. Principal and Rental payments also reduce the amount financed.
4. When all payments are made, the mortgage is discharged and the financier's interest passes to you.

The same structure is used for owner-occupied homes and investment properties, and for refinancing an existing home loan.

Who owns the property?

With our Ijaar home finance, you're the registered owner on the title from settlement. The financier holds a registered mortgage and a beneficial interest (an ownership share) in the property. That ownership share passes to you when all payments are made, and the mortgage is discharged.

Under Australian law, the legally binding documents are a credit contract and a registered mortgage. The Shariah documents sit alongside them.

Why is it a rental rate rather than an interest rate?

Under Ijarah, the financier's return is rent for the use of a real asset, not interest on money lent. That's why our Ijaar home finance has a rental rate. Like an interest rate, a rental rate can be variable or fixed, and what you pay depends on the product, how much you finance and fees.

How does Diminishing Musharakah work for SMSF commercial purchases?

Diminishing Musharakah is a partnership. We use it for Al-Mustaqbal SMSF, which is for self-managed super funds buying commercial property.

Al-Mustaqbal means "the future" in Arabic, fitting for finance that helps your self-managed super fund buy commercial property for your retirement.

• Your fund and the financier both contribute to the property, and a bare trustee holds legal title for your fund.
• Your fund makes payments over time to buy out the financier's contribution, plus a dividend on the financier's remaining contribution.
• On the final payment, legal title passes to your fund.

Al-Mustaqbal SMSF uses a dividend rate. It's for commercial property purchases only. Refinancing existing SMSF finance isn't available.

Is Islamic home finance regulated in Australia?

Yes, as credit. In Australia, credit is regulated by ASIC under the National Consumer Credit Protection Act, and the same responsible lending obligations apply to Islamic home finance as to any other credit. However, no government body certifies Shariah compliance.

Who checks that it's Shariah-compliant?

Our product structures and documents are reviewed by Riyadh Financial Services' Shariah adviser before they're offered, and again when a product changes. The current Shariah certificate covers our Ijaar home finance and Al-Mustaqbal SMSF, and it's available on request. Ask us for a copy and what it covers.

We explain how each structure works, but we don't give religious rulings. You're always welcome to seek your own scholar's view.

Do you need insurance?

Yes. You must keep the property insured with conventional insurance. Takaful (Islamic insurance) isn't currently available through our products.

How do you apply through an accredited broker?

1. Get started. Tell us a little about what you're looking for, and we'll connect you with an accredited broker.
2. Talk through your goals. Your broker explains how Ijarah works and which of our Ijaar home finance options may suit you.
3. Apply. Your broker checks your situation, confirms the documents you need and submits your application.
4. Approval and documents. If approved, you receive your credit contract, mortgage and Shariah documents to review and sign.
5. Settlement. The financier pays the seller, or your current lender if you're refinancing, and you're the registered owner.
6. Manage your finance. You make your payments and can manage your finance online.

General information only. It doesn't take into account your objectives, financial situation or needs. Fees, charges and credit criteria apply.