The Difference Between Islamic Financing and Conventional Mortgages
Whether you are purchasing a new home or refinancing your current home, there are a number of factors to consider. For many prospective homebuyers and families in Houston, one of
the most important decisions is choosing between a conventional mortgage and Sharia-compliant Islamic financing. Islamic financing is an alternative model based on faith-derived ethical principles and can be an attractive option for those who want to align their financing with their values. With years of experience, Devon Islamic Finance has built a solid reputation for providing advice and solutions tailored to clients’ unique needs. This article looks at key features of Islamic financing that set it apart from conventional mortgages and helps you understand which option may be best for you.
The Foundation of Ownership and Partnership Islamic financing differs from conventional mortgages in several ways, the most important being the underlying ownership structure. In a conventional mortgage, the bank lends the homebuyer money to purchase the property, and the homeowner makes monthly principal and interest payments until the loan is repaid in full. The bank charges interest for lending money known as riba (usury), which is strictly prohibited under Sharia. In an Islamic financing arrangement, no interest is charged, and the structure is based on partnership and co-ownership. Several structures may be used, including Murabaha and Musharakah Mutanaqisah.
The Role of Interest and Profit Conventional mortgages are interest-based products, meaning that the profit that the lender makes is derived directly from
charging interest on the amount of the loan. In a traditional mortgage, the borrower pays the bank a set interest rate over the term of the loan, and the amount of interest that is paid is directly proportional to the size of the loan. Islamic financing, on the other hand, can be structured in a number of ways that do not involve the payment of interest. For example, in a Murabaha contract, the bank would purchase the property and then sell it to the client at a pre-agreed price that is higher than the cost price, with the difference between the two prices representing the profit that the bank will make.
The Allocation of Risk The distribution of risk is another key difference between a conventional mortgage and Islamic financing. In a conventional mortgage, the risk is borne primarily by the borrower, while in Islamic financing, the risk is shared between the bank and the homebuyer. This is because, in an Islamic financing arrangement, the bank and the homebuyer are co-owners of the property. This means that if the value of the property decreases or if there is damage to the property, both parties will share in the loss, while in a conventional mortgage, only the borrower would bear the loss.
Ethical and Social Considerations Islamic financing is guided by values derived from Sharia. Funds are directed toward ethical, socially responsible activities and avoid haram sectors (forbidden), such as alcohol, gambling, and other prohibited industries. The emphasis is on supporting real
economic activity and trade rather than simply lending money. This differs from conventional banks, which do not apply these specific ethical screens.
Impact on the Community Islamic financing is a community-oriented system designed to promote shared well-being. By providing Sharia-compliant financing, communities can benefit from structures that avoid interest (riba), distribute risk more equitably, and channel funds into ethical investments aligned with community values and goals. For many in Houston, this alignment is a key reason Islamic financing is appealing.
Islamic financing and conventional mortgages differ from each other in terms of their ownership structure, interest versus profit, risk distribution, ethical and social considerations, and the impact on the community. Islamic financing is a Sharia-compliant, transparent, and fair way to finance a property, which is one of
the reasons why many people in Houston are turning to this method of financing. If you are considering financing your property with the help of Islamic financing, Devon Islamic Finance can provide you with expert guidance and support throughout the entire process. Visit their website today to learn more about your options or contact the office now to get started.
