Before you finance a home through a Sharia-compliant financier like Ijarah Finance, you should use an Islamic home loan calculator to help you determine what you can afford. This will assist you in planning better so that you can budget effectively, avoid unnecessary financial strain and ensure that the financing aligns with both your financial goals and the principles of Islamic finance.
Here are two common mistakes to avoid when making use of loan calculators:
Relying Solely on the Calculator
Islamic home loan calculators are designed to provide guidance and should not be relied on alone for concrete data on which to base critical decisions. Such tools will give rough estimates based on general parameters. This is useful as an exploratory tool to help you get an idea of what you can realistically afford before you take further steps.
However, before you make any final decisions regarding large and long-term investments, such as property ownership, you should consult with a finance advisor and work out the details. Only once you’ve gained thorough advice and insights from a qualified financial consultant should you consider taking the next step.
Confusing Interest Rate with Profit Rate
Charging interest on loans is forbidden in Islam, which is why halal lenders do not charge interest. Rather, Islamic financiers use financial structures like Murabaha and Ijarah, which work on the principle of rent to own, or cost-plus profit-making.
Under Murabaha, the financier buys the property and then sells it to the customer at a marked-up price, thus making a profit on the buying/selling arrangement without charging interest. The customer then agrees to pay the financier back the selling price over a set period, with no interest charged.
Ijarah finance is similar but works according to a leasing principle, whereby the financier purchases the house and holds it, leasing it to the customer in the interim. The customer then pays the financier in agreed-upon rental installments each month with a view to owning the property once all payment obligations have been met.
At the end of the lease term, the customer can either buy the property at an agreed price, renew the lease for another term, or simply move on. Typically, a portion of the lease payments is structured to contribute towards the eventual purchase price.
In such cases, it’s important to note that the profit rate or rental does not function like interest.
Misunderstanding these terms can lead to misconceptions regarding the costs and compliance of Islamic home loans.
Use our Islamic home loan calculator to help you determine whether our financing options are right for you. Contact Ijarah Finance to find out more about our halaal home loan options now.