Earlier this year, my wife and I bought a house.
Owning a house is everybody’s daydream, but the process of owning one can seem like a nightmare because of the amount of debts you are getting yourself into.
To start with, my wife and I am not a big fan of debts. We don’t own credit cards, we own a used car, and we rented a house for the first 3 years of our marriage. We prefer to spend the money we own, rather than pretending that we are wealthier than we really are.
If we can avoid debts, then we will avoid it by all means. If we can’t, then we will be sure to pay back as fast as possible. Like with the case of the used car we bought, we borrowed a sum of money from a family member and we paid him back in full within 2 years. The car is now ours, debt-free.
So the decision to finally buy a house is not something that was made overnight. It was the result of a long discussion between my wife and I, mostly about how necessary it is to own one and what is the best way to do it.
Question #1 – Rent or Buy?
Obviously, a house is a necessity. No question about that. But is it necessary to own one? Can’t we just rent forever? That was one thought that we had and it is tempting to walk that road. We don’t have to worry about debts and we have a house to live in.
But there is one issue: the amount that we pay for rent every month will accumulate to the amount equivalent to own a house. On top of that, rental price can increase over time. So, we could be paying more than the amount to own a house. But that’s just the economical incentive of owning a house.
Beyond that, there is another thing that we are concerned about. By renting, we are actually staying in somebody else’s house. Meaning, the owner can kick us out any time with due notice. Despite having the ability to pay the rent every month, the owner can have their house back.
Can’t blame the owner. It’s their house anyway.
On top of that, since we don’t own the house, we can’t pass it down to our kids. A house, unlike a car, is an asset that you can pass down as inheritance. But, you need to own it. You can’t pass down a rented house.
Question #2 – Cash or Financing?
Obviously, we don’t have RM300k in cash. It would be nice to have it, believe me. But we don’t. We could save up money, but then we have to deal with the fact that housing price is increasing.
So, our next best option is to use our money as much as we can afford, plus a financing plan. As I said before, my wife and I hate being in debt so this decision was not easy.
Many don’t realize this, but financing is not a necessity to begin with. It is a luxury. So, it is wise to think twice before deciding to swipe a card or enter a bank to ask for a financing plan. If you don’t need to be in debt, then don’t.
For us, we have decided that we need to own a house. Seeing that we managed to find one that is reasonably cheap compared to the market price and seeing that we are in a strong enough financial position to afford a financing plan, we went for it.
Question #3 – Which Financing Plan?
Generally speaking, making a choice of financing plan is a no brainer for me – of course I will choose Islamic. It is a spiritual choice that I have made peace with long ago. But when it comes to Islamic financing versus conventional loan, I have to admit that I was a bit skeptical about it in the beginning.
Not because of the “Islamic” part, but because of how similar it looks on the surface when you compare it to the conventional option. In both options, you go to a bank, ask for money to buy a house, you buy the house, and you pay the bank back the money – plus something extra.
I can’t deny the fact that both look very similar on the surface. So for a while, I stayed away from it just for that reason. It is only after I made my own research on Islamic financing and looked deeper into it that I realized that it is actually different than a conventional loan. Extra reading on the topic of Islamic financing really opened my eyes on the matter.
A conventional loan is exactly how I pictured it; you asked a bank for money, the bank lends you some, and you pay it back. But you don’t pay the exact amount that you owe, but you pay more. The extra that you pay is called interest or usury or riba.
I have a major problem with riba, mainly because Allah has forbid us to go near it.
“…Allah has permitted trade and has forbidden interest…” (Surah al-Baqarah, Ayat 275)
So when I saw that Islamic financing looks kind of the same with a conventional loan, I thought that it might be riba but packaged in a different way.
Though it might look the same, but the mechanism is quite different. In an Islamic financing, you are not really loaning money. Islamically speaking, you can’t make profit on top of a loan. That is why the technical term used is always Islamic financing and not Islamic loan.
If it is not a loan, then what it is? To put it simply, it is a business deal made between the bank and you. You don’t ask the bank for money. Rather, you asked the bank to buy the house for you first. Then, you will buy the house from the bank. The extra that you pay is the profit (i.e. not riba) that the bank is entitled to because the bank is selling you something (i.e. the house).
Having the basic mechanism explained to me has put my heart at ease about Islamic financing.
I made a mistake of assuming that conventional loan and Islamic financing are one and the same. If you are not sure, then ask. Go and find out for yourself and then make a decision. Any decision shouldn’t be made without being properly informed about the thing that you want to decide on.
Do your homework. Have a discussion with your spouse about the necessity of owning a house. Get out and find out about the financing options available for you. Ask the people who know about the topic to explain it to you.
People like IBFIM, for example, can help you out with all that you need to know about Islamic financing. Regulated by Bank Negara, they also provide various qualification training programs in Islamic finance. So in case you want to go deeper into the subject, IBFIM is the place to go: ibfimonline.com/about-us
After having all the right knowledge at your disposal, only then can you make a well informed decision about something, especially something as important as owning a house.