Sharia student account

[AtW]

But surely repayments should be variable and linked to BoE rate - or the whole morgage has got to be of effectively fixed rate interest?

[oraclesmith]

Well, yes and no.
It would depend how much of the "loan" had been paid back, compared to how much they originally lent, taking into account how much they'd made on the "rental".

How many banks and building societies went bust during the last property crash? None, IIRC. These guys have the same exposure as in a normal loan.
They lend an amount a against the value of a property p. They just have different words to describe what they're doing.

But would they have the same exposure ? If they part own the property, they would be exposed more to the property market than with a regular mortgage. A mortgage is simply a loan secured against a property , the bank is not mentioned on the deeds. If you sell the property for less than you need to pay the mortgage, then you owe the whole of the difference to the bank. If it's repossessed, then the same applies - the debt is not necessarily written off. With an equity share arrangement, you could argue that you are jointly investing in the property market and jointly sharing in any profits and losses. This means the bank may be an active participant rather than a background lender.

[Fleetwood]

There's confusion here.
In my example the bank buys a 150K house, sells it to you for 200K, and you pay back over say, 25 years. That is the equivalent of a fixed-rate deal.

In the other example given on the website, there is a "partnership" wherein you give a monthly payment to the bank on the 150K house which is in fact the sum of two things :

a) you buy a portion of the bank's equity in the house.
b) you pay them "rent" on the part of the house they own. The "rental" part of the payment is variable, but is conveniently a percentage over LIBOR, but it isn't "interest", oh no.

[Fleetwood]

you are jointly investing in the property market and jointly sharing in any profits and losses

On one level, yes. BUT,a part of what you pay back each month is "rental" under Sharia or "interest" in non-Sharia and the other part is capital, so the bank's exposure is identical under each system. Again, how many banks went under during the housing crash? None, because they'd made money on the rental/interest*.
Even in a crash,as long as the house is sold for more than the amount of capital remaining to be paid, the bank is sorted.
On the odd deal, they may lose, but generally, they don't.

(*delete as appropriate)

[oraclesmith]

Ok. In the first example, they can't actually sell it to you as you haven't got the £200k. They must be transferring ownership of the house to you and agreeing a fixed rate loan which is secured on the property. So if you sell it for £400k, then you can pay back your loan of £200k. And if you sell it for £100k, then you still owe the bank the other £100k. That works OK.

But the second example is a gradual transfer of equity from one party to the other. At any one point in time, you could choose/ask-the-bank to sell the house and presumably jointly take a profit or a loss - unless the bank's only interest is the original purchase price in which case the profit/loss would be all yours.

For example, say you make a bad investment and have to sell at a loss. With a shared ownership basis, you may only be liable for 10% with the bank taking the 90%, assuming the bank allows you to sell up in the first place. In which case there is a wonderful opportunity for fraud.

[AtW]

But do banks actually offer fixed rate morgage for the whole period, without such rate very high to hedge their risks?

[oraclesmith]

Most I've seen is 10 year fixed rate with the Nationwide.

[Fleetwood]

Ok. In the first example, they can't actually sell it to you as you haven't got the £200k. They must be transferring ownership of the house to you and agreeing a fixed rate loan which is secured on the property. So if you sell it for £400k, then you can pay back your loan of £200k. And if you sell it for £100k, then you still owe the bank the other £100k. That works OK.

They are lending you 200K, without interest, secured on the property you have just bought,whose value when purchased was 150K.

But the second example is a gradual transfer of equity from one party to the other. At any one point in time, you could choose/ask-the-bank to sell the house and presumably jointly take a profit or a loss - unless the bank's only interest is the original purchase price in which case the profit/loss would be all yours.

For example, say you make a bad investment and have to sell at a loss. With a shared ownership basis, you may only be liable for 10% with the bank taking the 90%, assuming the bank allows you to sell up in the first place. In which case there is a wonderful opportunity for fraud.

Agreed. Presumably, when the bank owns more than 50% of the equity, it can decide whether to sell or not. If it owns less than 50%, they you decide, but even in a worse-case scenario, the house would have had to have lost half its value by this point for the bank to show a nominal "loss" on the deal. Bear in mind, you have been paying them rental or interest (whatever you want to call it) as well.

[AtW]

The effective interest rate that they don't say ought to be much higher than normally, that's why banks are happy to comply with Sharia law. I bet bank managers doing these are not women in short skirts either...

[oraclesmith]

Agreed. Presumably, when the bank owns more than 50% of the equity, it can decide whether to sell or not. If it owns less than 50%, they you decide, but even in a worse-case scenario, the house would have had to have lost half its value by this point for the bank to show a nominal "loss" on the deal. Bear in mind, you have been paying them rental or interest (whatever you want to call it) as well.

Oooh. That means that you haven't got any real control over the property for about 8-10 years ? What if you wanted to quit the property ladder for reasons other than financial ones ? What if you wanted to rent it out when you only own 10% ? What about all the regulations/legislation relating to property owners ?