How Islamic Mortgages Work
Islamic home finance avoids interest (Riba) by using different contractual structures. Here are the three most common methods used in Australia.
Murabaha (Cost-Plus Sale)
In a Murabaha arrangement, the bank purchases the property at market price and immediately sells it to you at a higher, agreed-upon price. You pay this in fixed instalments over an agreed period.
Transparency: You know the total cost upfront — no hidden fees or fluctuating rates.
Fixed payments: Your instalments never change, making budgeting easier.
Ownership: The property is transferred to your name from the start.
Ijara (Lease-to-Own)
With Ijara, the bank buys the property and leases it to you. You pay monthly rent, and at the end of the lease term, the property is transferred to your ownership.
Flexibility: Rent can be reviewed periodically, similar to standard mortgage rate reviews.
Lower upfront cost: Typically requires a smaller deposit than Murabaha.
Maintenance: The bank (as owner) is responsible for major structural repairs.
Diminishing Musharaka (Partnership)
You and the bank jointly purchase the property as partners. Over time, you buy the bank's shares one by one while paying rent on the portion you don't yet own. Your ownership increases until you own 100%.
Gradual ownership: You build equity with each payment.
Shared risk: Both parties share the risks and rewards of ownership during the partnership.
Popular in Australia: This is the most common structure offered by Australian Islamic finance providers.
Key Principles of Islamic Finance
No Riba (Interest)
Charging or paying interest is prohibited. Profit comes from trade and investment, not from lending money.
No Gharar (Uncertainty)
Contracts must be clear and transparent with no excessive uncertainty or ambiguity.
Risk & Reward Sharing
Both parties share the risks and rewards of the investment, creating a fairer financial relationship.
Asset-Backed
All transactions are backed by real assets — no trading in debt or speculative instruments.