About Mortgages
Home financing can be availed to buy or refinance a home. These are generally long-term loans that have a certain tenor and pre-decided monthly installment payment. For people looking to buy a home, home financing provides a way to achieve this without having all the cash up front.
Variable Rate Financing
Variable rate home financing has a flat rate which changes in line with changes in global market flat rates. The amount charged on a variable flat rate loan is linked to an underlying benchmark or index. For those using variable rate home financing, the amount payable each period will vary, which should be front of mind for borrowers. This means that if global market rates rise rapidly, the buyer may have to pay higher monthly installments that can exceed their financial capabilities.
Fixed Rate Financing
Fixed rate home financing has the same flat rate for the entirety of the financing tenor. The payments of the loan will be the same every month. A fixed rate can be obtained through SRC’s partners, courtesy of SRC via Murabaha and a Fixed Ijarah. Fixed rate financing can help you prudently plan your financial commitments given their fixed nature throughout the tenor.
There are two types of home loans available to home buyers in Saudi Arabia.
Murabaha
is a contract that is also known as cost plus financing. Murabaha financing solutions are primarily beneficial because from day one – the moment the contract is agreed upon – the property officially belongs to you and is registered in your name. The repayment period and monthly repayment amounts are agreed between you and the lender, with repayments fixed for the term of the mortgage.
Ijarah
is a contract where you rent a house and the house belongs to the bank until you pay off your loan. Ijarah contracts are popular in many parts of the world. There is a primary difference between Ijarah and Murabaha offerings. With an Ijarah, the property is not immediately registered as belonging to the beneficiary. Instead, the property is essentially rented from the lender. Full ownership of the property transferred to the buyer at the end of the agreed term or once the purchase price has been repaid in full.
Recent developments in Islamic Financing that have been spearheaded by the Saudi Real Estate Refinance Company enables Murabaha mortgages to be refinanced at much lower profit rates, which can help reduce monthly payments.
A key difference between the two types of financing is under a Murabaha contract all other costs related to maintenance and other obligations are charged to the buyer while under an Ijarah contract, the lender has to cover activities such as basic maintenance. Ensure to check with home financing provider about the benefits of the two types.