Has anyone used a riba free mortgage

10 Replies

I tried searching it on the forums and it pulled up zero results. Does anybody have any experience with riba free, or interest free, financing? It’s an Islamic form of banking.

I have no experience with this company. I googled it and that’s really interesting. Is this structured similarly as a 30 year “share buy back” type agreement?

@Dustin Ruff It ain't much of a mortgage if it's interest free. I have some experience in dealing with Islamic finance. Most of Islamic finance is neither Islamic nor finance (not saying all). 

In most cases, if you read the fine print, most of these loans have awful terms. Can't be very religious if it's exploitative on pricing. 

The implicit interest rate is multiples of a conventional loan. They are also, mostly, securitized and sold off like regular loans i.e. no difference in substance compared to a conventional residential loan. 

In other words, how can a lender claim to offer interest free loans if they are sourcing their funding from sources that are, primarily, interest-based?

That's akin to being against eating pork but being ok with pork by-products :) (for the religiously inclined)

@Omar Khan I googled this company and according to what I read it basically goes like this. They charge you a fee to use the house as they are co owners in the property with you. Each payment you give them is buying “shares” to get the house all your own eventually. Not sure if that’s amortized like a normal loan or what not. I imagine the fee is on going too.

So instead of paying interest you pay a “fee” which is probably more. Would that be tax deductible? Not sure it would be for a primary. Lol which makes it more expensive if that’s true

@Caleb Heimsoth They are structuring this as a partnership because Islamic law (like Judeo/Christian law) frowns up the concept of interest. 

Where practitioners start splitting hair is that they combine the PI component into one fee and add a "service charge" or fee. Usually, it would be cheaper to get a similar quality loan in the open market. Since they are creating a synthetic product, they add layers upon layers of fees on top of the PI and come up with a egregious "service charge" or fee. 

In most cases, companies that offer such products are often working within minority ethnic / religious groups. They then advertise this as a religiously approved means of financing one's purchases preying on people's emotions / beliefs.

One must look at the source of the initial capital. Most, if not all, of that capital is being derived from interest-based instruments i.e. conventional bank deposits which get lent to other intermediaries. 

Or in other words, it doesn't matter if you call it a mortgage payment or a "service charge"/fee. It's all the same. As a consumer you just end up paying more with a false sense of smugness that you are somehow not participating in the evil, interest-based banking system (which is a nice thing to tell yourself... but a lie). 

P.S. Because it is not an interest charge, it is not tax deductible unless it is structured as a cost of financing (i.e. interest!).

@Omar Khan  interesting,  cool that I got the tax thing right.  Learn something new everyday.  Personally I wouldn’t touch something like this with a 10 foot pole but there’s got to be a market for it even if it’s small.

Interestingly enough even though I was raised Christian the whole “interest is bad”Thing never came up.  

@Caleb Heimsoth I don't think it's bad. It's the cost of doing business. Plus, nobody is forcing people to take a loan to buy an investment property. 

But an orthodox Judeo/Christian legal framework frowns up on it based upon occasions/incidencts like Jesus cleansing the Temple of money lenders (Matthew 21:12, as per Google). Interest is most closely tied with the concept of usury which has exploitative underpinnings. 

We also see this immortalized in literature i.e. Shylock in Merchant of Venice or Ebenzer Scrooge (more a lover of avarice than a money lender, but similar category).

Essentially, money created out of money was considered borderline heretical because it was viewed as not contributing to society's progress/mankind's salvation/the works. 

Don't know how you could fun a smooth economic engine without it. Unfortunately, they don't consult me before taking such decisions ... lol

@Omar Khan  I get what you’re saying and it makes sense I just feel it’s a bit of a stretch at least in the Christian/Judaism sense.  

My dad who works in finance has talked about some of how he sometimes doesn’t feel he creates anything of value.  His whole career is moving money around (risk management) and using money to make money.  That’s not tangible.  

I’m an engineer, my whole job is tangible.  We both create massive value (him more dollar wise lol) but only I can physically feel that value.  Just an interesting concept. 

@Dustin Ruff Riba/Interest free banking is same as selling property via "Land Contract" aka lease to own and implied interest is baked into the monthly payment. 

In concept its a fixed monthly payment and bank will own the risk of market volatility  thus reduces increase in payment if prime/libor rate goes up. This is prohibit and exploitation via interest rate hike (i.e. pay day lender) 

Its geared towards folks who dont want to pay/receive interest earnings which is a very small fraction (1/70th of 1 percent or less) . This is why its highly unusual to be used for investments thus no one on this forum talks about this.  On the flip side , this is a good options for people of low/bad credit who would be inclined to get a variable banking note. I haven't seen this to be offered for commercial loan typically. 

@Shahriar Khan This would work if the lender was (A) not, primarily, deriving their income from interest-based instruments and (B) no legitimate bank currently will take on the added burden of market volatility. They are there to run their business not hold an investor's hands. 

The only "banks" that are offering these products (at least, in the US) happen to be financial intermediaries who are essentially brokers. They source their funding from lenders and pay them interest i.e. religiously speaking only, the money is tainted at the source. 

If you read the fine print, these intermediaries point out that all of this (fund sourcing, etc) plus the fact that, in most cases, they will securitize these loans and sell them off - just like in conventional banking. When they securitize and sell, you cease to have a "profit-and-loss" type relationship with the original lender - which is the whole reason for engaging in this type of financing. 

That's why you see the vast majority of riba-free loans being offered only in ethnic communities with little to no oversight on their operations/compliance and the like. You never see these intermediaries side-by-side with legitimate, brand-name lenders for a reason.

Furthermore, it can't be very religious if the implicit cost of financing (you call it a service charge/fee/interest) is multiples of what one would get with a conventional loan. That amounts to preying on a borrower and that is SPECIFICALLY prohibited.