The Differences Between Islamic and Conventional Mortgages You Should Know

Among the many ways and schemes to purchase a home, a mortgage (KPR) is one of the most popular. This scheme allows individuals to make installments, where the amount of the installment can be adjusted to their income, making it quite convenient, whether purchasing a regular commercial home or a subsidized home.

In the banking world, there are two types of mortgages: Islamic mortgages (KPR Syariah) and conventional mortgages (KPR Konvensional). Both have fundamental differences in their approach, principles, and concepts. This article will discuss the differences between Islamic and conventional mortgages, helping you understand which one is more suitable based on your principles and financial situation.

Differences Between Islamic and Conventional Mortgages

Basic Principles

One of the most fundamental differences between Islamic and conventional mortgages is their basic principles. Islamic mortgages are based on Islamic economic principles, which prohibit riba (interest) and require the principle of risk-sharing. In Islamic mortgages, the bank acts as an investment partner, sharing ownership of the property with the customer.

Meanwhile, conventional mortgages use an interest-based system that generates profit for the bank. Therefore, the mortgage financing will only be approved by the bank if all calculations prove to provide a profit.

Interest Scheme

Interest is a significant point of difference between Islamic and conventional mortgages. In Islamic mortgages, no interest is charged. Instead, the bank and the customer agree on sharing the profit or loss based on the property ownership.

On the other hand, conventional mortgages charge either a fixed or fluctuating interest that must be paid by the borrower. If you choose a conventional mortgage, you should be prepared for the possibility that the installment amount may increase each year.

However, this is different if you choose a subsidized home mortgage. Some developers allow you to pay a low down payment with a flat installment scheme until the home is fully paid off.

Risk and Profit Sharing

The next difference between Islamic and conventional mortgages lies in the issue of risk and profit sharing. Islamic mortgages implement a risk-sharing principle between the bank and the customer. If the property value declines, both parties share the loss. However, if the property value increases, the profit is also shared fairly.

In conventional mortgages, the risk is fully borne by the borrower, while the bank continues to receive the agreed-upon interest.

Non-Material Benefits

In addition to financial aspects, Islamic mortgages also offer non-material benefits in line with Islamic principles. Harmony, ethics, and social responsibility are emphasized in Islamic mortgages, which may not always be the focus in conventional mortgages.

Document Requirements

In terms of document requirements, both Islamic and conventional mortgages generally have similar requirements. However, in Islamic mortgages, the approval process may involve more in-depth analysis of the proposed property project, given the risk-sharing principle.

Legality and Regulations

Islamic and conventional mortgages in Indonesia have different legal foundations and regulations. Islamic mortgages are governed by Islamic law principles and are supervised by the National Sharia Board. Meanwhile, conventional mortgages are regulated by the applicable conventional banking laws.

Given the differences in regulations between Islamic and conventional mortgages, once you decide which type of mortgage to choose, it is advisable to carefully study its details. This will help you understand your rights and obligations throughout the transaction process.

Conclusion

Choosing between an Islamic mortgage and a conventional mortgage is an important decision that should be carefully considered. This applies whether you are purchasing a regular commercial home or a subsidized home.

If you wish to follow Islamic principles in financial transactions and share the risk with the bank, an Islamic mortgage may be the right choice. However, if you are more comfortable with a conventional interest-based system and are willing to bear the full risk of the property, a conventional mortgage may be a suitable option.

It is important to understand the fundamental differences between the two so you can make a wise decision according to your principles and finances. Don’t forget to choose a reputable subsidized home developer and bank to ensure that you, as the buyer, are well-supported during the buying process.