Someone posted this comment in response to my article on Islamic home financing:
“Is it really different from a conventional mortgage? Or are they charging a fee like interest but calling it something else?”
That question still remains …is the rent payable not synonymous to interest ?
Some of the comparisons are also flawed.
In some conventional mortgages where your contract allows overpayment ..any payments in addition to the monthly interest (rent) would also reduce the total capital owed which can be reflected as lower monthly interest (rent) payments or a reduction in the term should you choose not to go for the former option.
The only tangible difference seems to be around risk and profit which is a setup that has both pro’s and con’s.
If your property depreciates ..you are not at a significant loss but equally if the price appreciates significantly over a lengthy period (more likely) then you would also not be party to the larger part of that increase.
So yet again..comparitively over a long term of lending you would be disadvantaged by engaging in such a venture but would have a degree of protection against any property market downturn.
“That question still remains …is the rent payable not synonymous to interest ?”
I can see why this can be confusing. The homebuyer is paying monthly fees (interest payments are also monthly fees) and they’re not getting more property from those monthly fees (interest payments also don’t earn you more property).
The difference here is that the financier (in this case, the co-op) actually shares ownership in the property. They will share in benefit when the property value goes up, they will share when it goes down. If the home buyer can’t pay rent anymore and the house needs to be sold, they will share the proceeds from the sale of the house according to the proportion that they each own.
In a conventional mortgage, the bank doesn’t share ownership of the property. Whether the property value goes up or down, the bank will still be entitled to get the principal of their loan back plus interest. If the buyer can’t make their mortgage payments anymore, foreclosure will ensue, and the bank will sell the house to recoup whatever is remaining on the loan. The buyer gets nothing even if they’ve been paying the mortgage for years.
You’re right about the tangible differences around risk and profit and the pros and cons involved. Depending on the price of the house, the market rent, the prevailing interest rates at the time, whether you can overpay the mortgage, etc. there are situations where the conventional mortgage is financially advantageous and where it’s not.
Do you mind elaborating on which comparisons are flawed?