Is Mortgage Haram? Why Islam Forbids Mortgages

Assalamu alaikum and greetings to all my readers. Mortgage, in simple terms, is a loan that is secured by property or real estate. The borrower takes out a loan to purchase a property, and the lender holds a lien on the property as collateral until the loan is repaid. This is a common practice in many countries, but the question remains, is it permissible according to Islamic law?

Inshallah, by the end of this article, you will better understand why a mortgage is not considered permissible in Islam and why it is important to abide by the principles of Islamic finance in our financial dealings.

Understanding Islamic Finance

Before we delve into the topic of mortgages, it is important to understand the principles of Islamic finance and how they relate to this discussion. Islamic finance is based on fairness, transparency, and mutual benefit principles. It promotes ethical and socially responsible investing and lending, avoiding activities considered harmful to society.

Let us take a look at the top five key principles of Islamic finance:

• Prohibition of Interest (Riba): Interest-based transactions are strictly prohibited in Islamic finance as they are considered exploitative and unfair.
• Avoidance of Uncertainty (Gharar): Islamic finance emphasizes the importance of clarity and certainty in financial transactions and prohibits excessive uncertainty and risk.
• Risk Sharing: In Islamic finance, the lender and the borrower are expected to share the risk of the transaction. This promotes fairness and mutual benefit.
• Promoting Ethical and Socially Responsible Investing: Islamic finance promotes ethical and socially responsible investing, avoiding activities considered harmful to society.
• Transparency and Fairness: Islamic finance emphasizes the importance of transparency and fairness in all financial transactions.

It is important to understand these principles of Islamic finance when discussing mortgages because they serve as the basis for determining the permissibility of a financial transaction in Islam. For example, if a transaction involves interest, it is automatically considered haram in Islam due to the prohibition of riba. Additionally, if a transaction involves excessive uncertainty, it is also considered haram due to the principle of avoiding gharar.

Is Mortgage Haram?

According to Islamic finance, mortgage is considered haram as it involves interest-based transactions, uncertainty in repayment, and exploitation, which are all prohibited in Islam. Islamic finance principles encourage Muslims to avoid engaging in financial transactions that are considered haram and instead opt for alternatives that align with the teachings of Islam.

Here are top 3 reason why mortgage haram in Islam:

Reason 1: Interest-based Transactions are Prohibited (Riba)

One of the key principles of Islamic finance is the prohibition of interest, also known as riba. Interest is considered a form of exploitation and is strictly forbidden in Islam. This is because it is seen as an unfair and unjust way of making a profit and is considered a form of usury.

The following Quranic verses prohibit the taking and paying of riba:

“O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers. And if you do not, then be informed of a war [against you] from Allah and His Messenger.” (Al-Baqarah 2:278-279)

“Allah has permitted trade and has forbidden riba.” (Al-Baqarah 2:275)

In addition to the Quranic verses, several Sahih hadiths prohibit the taking and paying of riba:

“The Messenger of Allah (peace be upon him) cursed the one who takes riba, the one who gives it, the one who records it, and the two witnesses to it.” (Sahih Bukhari and Sahih Muslim)

“Riba has seventy segments, the least serious being equivalent to a man committing adultery with his own mother.” (Ibn Majah)

Involvement of Interest in Mortgage

Now, let us understand how the mortgage is related to interest. Here are the top three key points that demonstrate this connection:

1. Payment of Interest: One of the most common forms of mortgage involves the payment of interest. The borrower takes a loan from the lender and pays back the principal amount and additional interest. This interest is usually calculated as a percentage of the principal loan amount and is paid over a specified period of time.
2. Compound Interest: In some cases, the interest may be compounded, which means that the interest charged on loan is added to the principal amount, and the interest for the next period is calculated on the increased principal amount. This leads to a spiral of debt, where the borrower has to pay an increasing amount of interest every year, making it harder for them to pay off the loan.
3. Increase in the Loan Amount: In some mortgage systems, the lender may have the right to increase the loan amount if the borrower fails to make a payment. This effectively means that the borrower has to pay back more than what they originally borrowed, which is a clear violation of Islam’s principle of justice and fairness.

Islamic Alternative to Mortgage: Avoiding Interest-based Transactions

I understand that you may wonder what alternatives there are to mortgages to avoid interest-based transactions. Let me explain the Islamic alternative to mortgages.

The Islamic alternative to mortgage is called “Ijarah”. In this system, the lender provides the borrower with an asset, such as a house or a car, for a specified period of time in exchange for a rental fee. The rental fee is calculated based on the asset’s market value and is paid by the borrower over a specified period.

In this system, the lender is not charging interest but is instead offering the use of their asset for a fee. This fee is based on the asset’s market value and is not compounded, making it easier for the borrower to pay off their debt over time.

This system is in accordance with Islamic finance principles because it is based on a mutually beneficial transaction between the lender and the borrower. The lender can profit from the rental fee, while the borrower can use the asset for a specified period. Do you know how does halal mortgage work?

Reason 2: Gharar (Uncertainty)

Islam places great importance on fairness and transparency in all transactions. The principle of avoiding uncertainty in transactions is derived from several verses in the Quran, including the following:

“O believers! Avoid many suspicions, ˹for˺ indeed, some suspicions are sinful. And do not spy, nor backbite one another. Would any of you like to eat the flesh of their dead brother? You would despise that! And fear Allah. Surely Allah is ˹the˺ Accepter of Repentance, Most Merciful.” [Surah Al-Hujurat 49:12]

“Indeed, Allah commands justice, grace, as well as courtesy to close relatives. He forbids indecency, wickedness, and aggression. He instructs you so perhaps you will be mindful.” [Surah An-Nahl 16:90]

This principle requires that all transactions should be based on mutual agreement and that the terms of the transaction should be clear and known to all parties involved. In the case of a mortgage, the loan repayment is uncertain, as the borrower may not be able to repay the loan in full or may default on the loan.

How Mortgage Involves Uncertainty

1. Repayment Amount: In a mortgage, the repayment amount is not fixed and can change over time, due to factors such as fluctuating interest rates or changes in the property’s value. This uncertainty makes it difficult for borrower to predict their future financial obligations, leading to a higher risk of default or inability to repay the loan.
2. Repayment Period: The repayment period for a mortgage is also uncertain, as it can be extended or shortened based on various factors, such as changes in the borrower’s financial situation or market conditions. This uncertainty creates a degree of unpredictability for the borrower, making it difficult for them to plan for the future.
3. Default: Default is a common outcome in mortgage transactions, as the borrower may not be able to repay the loan in full. This uncertainty creates a risk for the lender, as they may not be able to recover their investment. Furthermore, the uncertainty surrounding default creates additional financial and legal challenges for both the lender and the borrower.

Islamic Alternatives that Avoid Gharar

Murabaha: Murabaha is an Islamic finance product that allows the borrower to purchase a property by paying the purchase price in instalments. In this product, the lender buys the property and sells it to the borrower at a higher price, with the agreement that the borrower will repay the purchase price in instalments over a fixed period. This product avoids uncertainty as the repayment amount and period are agreed upon in advance, providing the borrower with clarity and predictability.

Ijara: Ijara is another popular Islamic finance product that avoids uncertainty in repayment. In this product, the lender purchases the property and rents it to the borrower for a fixed period. At the end of the rental period, the borrower has the option to purchase the property or return it to the lender. The repayment amount and period are agreed upon in advance, avoiding uncertainty in repayment.

Diminishing Musharaka: Diminishing Musharaka is a type of joint venture between the lender and the borrower, where the lender provides the funds to purchase the property and the borrower manages it. Over time, the borrower gradually buys the lender’s share of the property, until they own it completely. This product avoids uncertainty as the repayment amount and period are agreed upon in advance, providing the borrower with clarity and predictability.

Reason 3: Exploitation

One of the key principles of Islamic finance is to avoid exploitation, and mortgage is considered haram for this very reason.

Exploitation of Mortgages

Exploitation in the mortgage system can happen in various ways. One common example is when lenders take advantage of borrowers’ lack of knowledge or financial insecurity. This can result in lenders offering unfavorable loan terms, such as high interest rates, hidden fees, and unfavorable payment schedules. Additionally, some lenders may pressure borrowers into taking on more debt than they can reasonably afford, leaving them in a cycle of debt and exploitation.

Another example of exploitation in the mortgage system is when lenders engage in discriminatory practices, such as denying loans to certain individuals based on their race, ethnicity, or religion. This violates basic human rights and contributes to larger systems of inequality and oppression.

Exploitation-free Islamic Alternatives

One such alternative is the concept of Islamic Home Financing, which is based on the principle of “Diminishing Musharakah”. In this type of financing, the lender and the borrower enter into a partnership, and the lender provides the funds for purchasing the property. The ownership of the property is gradually transferred to the borrower as they make payments towards the loan.

Another alternative is the “Ijara” financing, where the lender provides the funds for purchasing the property, and the borrower rents the property from the lender. The rent payments made by the borrower go towards paying off the loan and eventually the ownership of the property is transferred to the borrower.

Mortgage Alternatives Based on Islamic Principles

One of the most popular Islamic alternatives to mortgage is the Musharakah Mutanaqisah contract. This is a form of partnership between the bank and the customer, where the bank provides the funds for the purchase of a property, and the customer pays the rent. The customer also gradually buys the share of the bank in the property, until they own it completely.

This contract is based on profit and loss sharing principles, which means that the risk of the investment is shared between the bank and the customer. If the property appreciates value, both parties share the profit. Conversely, the loss is also shared if the property depreciates in value. This helps to eliminate the uncertainty in repayment that is present in traditional mortgage contracts.

Another benefit of this contract is that it is not based on interest. Instead, the customer pays a rent to the bank, which is used to cover the cost of the loan and provide a profit to the bank. This eliminates the prohibition of interest-based transactions in Islam.

Finally, the Musharakah Mutanaqisah contract eliminates the exploitation element present in traditional mortgage contracts. The customer and the bank are partners in the investment, which means that both parties are treated fairly and equitably. Read this post, if you want to know: how to get a halal mortgage?

Why Muslims Should Abide by Islamic Finance Principles?

1. Upholding Religious Beliefs: Adhering to the principles of Islamic finance allows individuals to uphold their religious beliefs and values in their financial dealings.
2. Promotes Justice and Fairness: Islamic finance prohibits exploitation, interest-based transactions and uncertainty, ensuring that all financial transactions are just and fair.
3. Encourages Ethical Business Practices: By following the principles of Islamic finance, individuals and businesses can ensure that their financial dealings are ethical and in line with the teachings of Islam.
4. Fosters Strong Relationships: Following the principles of Islamic finance promotes strong relationships between partners, as transactions are based on mutual cooperation and trust.
5. Increases Financial Stability: Abiding by the principles of Islamic finance can increase financial stability as transactions are based on principles of risk sharing and reducing uncertainty.

Final Thoughts

Is mortgage haram? It is clear that mortgage is haram in Islam due to several reasons. First and foremost, it involves interest-based transactions, which are strictly prohibited in Islam. Secondly, mortgage also involves uncertainty in repayment, and avoiding uncertainty in transactions is a fundamental tenet of Islamic finance. Thirdly, mortgage can involve the exploitation of the borrower, which goes against the principles of justice and fairness in Islam.

By following the principles of Islamic finance is important in ensuring that financial transactions are carried out in a fair and just manner. By avoiding mortgage and seeking alternatives that are based on Islamic principles, we can ensure that our financial transactions are in line with the teachings of Islam and bring peace of mind and financial stability to ourselves and our families.

Mortgage and Islamic Finance (FAQs)