A mortgage is a loan obtained to purchase real estate or land. Your home or land is used as collateral for the loan, so if you don’t make your payments as agreed, the lender may compel you to sell one or both in order to recover their investment. There is typically only one option available when looking for a mortgage: the traditional one. But you can notice lenders giving you multiple mortgage services in Islamic countries like the UAE. This article will walk you through the two widely used types of mortgages in Dubai, conventional mortgages and Islamic mortgages, as well as the advantages of Islamic home financing in Dubai.
Defining Conventional Mortgages
The majority of banks and financial institutions in Dubai and around the world offer conventional mortgages, which are the most prevalent type of mortgage. Financial organizations and mortgage lenders offer loans for the purchase of new homes at a set interest rate. Conventional mortgages include two components: the principal amount, or the amount borrowed, and the interest rate. The principal and interest must be repaid within a maximum of 25 years.
Defining Islamic Mortgages
An Islamic mortgage generally called a Shariah-compliant mortgage, is a type of mortgage that complies with the Shariah law. It works in a completely different way as Islamic financial laws prohibit charging interest. For Islamic financing or mortgages, several models exist, but Ijarah and Murabaha are two of the most commonly used models for Islamic Home Finance in Dubai.
What Sets Them Apart?
Since Islamic mortgages have no interest rates, the prevailing consensus is that they are preferable to traditional mortgages and that non-Muslims must get Islamic mortgages in Dubai. But before you submit an application for an Islamic mortgage, allow us to explain how it differs from a normal mortgage.
Purchase & Lease Back Arrangement
The most significant difference is that the loan is not a debt with Islamic Mortgage. Instead, it is a partnership between the borrower and the lender, sharing the profits or losses of the property. This is helpful when you’re buying a property off-plan, as you don’t have to pay anything until the property completes.
No Interest Rates or Late Payments
Another significant difference between an Islamic and conventional mortgage is that there is no interest charged on Islamic loans. Instead, a profit rate is applied, which is calculated based on the value of the property at the time of sale. This is because a loan is supposed to be a helping hand from a person to aid another as a kind gesture of charity and the lender can only expect to receive the amount of money they lent out. The bank or the lender buys the property on your behalf and then resells it to you at a profit. The buyer or the customer then pays back to the bank in monthly installments.
Shorter Mortgage Terms
Finally, Islamic mortgages typically have a shorter term than conventional mortgages, with most being repaid over 5-7 years. This is because Shariah law prohibits the lending of money for longer periods.
Conclusion
If you’re thinking about getting a mortgage in Dubai, it’s crucial to weigh your options and select the mortgage that best meets your needs. If you want to avoid paying interest and have the financial means to pay off your mortgage in 6-7 years, you should consider Islamic home financing in Dubai. Islam forbids the purchase or sale of anything that is worthless on its own. You also cannot buy it because you must take out loans, which cost additional money, and because money has no intrinsic value. As a result, Islamic banks exclusively aim to promote economic growth that is halal and in compliance with Sharia law.
