I think market dynamics could produce a situation where interest is close to zero. Besides that lending with interest is illegal in several societies.

Mortgage rates are close to zero already. What scenario do you imagine would drive them even closer to zero? And in such a scenario, why would anyone bother making loans?

Market dynamics are not magic. If it's not profitable to lend money, no one will.

The only way I could see rates hitting zero would be if the government started charging interest on money sitting in banks. Such an event would not be a sign of good housing opportunities so much as a sign of significant economic struggles.

https://en.wikipedia.org/wiki/Islamic_banking_and_finance "Sharia prohibits acceptance of specific interest or fees for loans of money (known as riba, or usury), whether the payment is fixed or floating . . . As of 2014, sharia compliant financial institutions represented approximately 1% of total world assets. By 2009, there were over 300 banks and 250 mutual funds around the world complying with Islamic principles and as of 2014 total assets of around $2 trillion were sharia-compliant. According to Ernst & Young, although Islamic Banking still makes up only a fraction of the banking assets of Muslims, it has been growing faster than banking assets as a whole, growing at an annual rate of 17.6% between 2009 and 2013, and is projected to grow by an average of 19.7% a year to 2018."

Just one example.

They seem to replace interest with fees or commissions.

Islamic banking isn't equivalent to interest free loans, it's a separate system.

Islamic banks still profit from loans.