Home Equity Loans
Question:
My wife and I are intending to buy a house. We are looking into a Housing Association Loan which is on offer to key workers like us in Britain. Could you please comment on the permissibility of this loan of £20,000, here are the details from the info sheet:
“Equity Loan: With this scheme, you identify a property on the open market and Key Start Homes will give you an equity loan up to 20% of the purchase price up to the value of £20,000. You will have to repay this loan only if you sell the property. It will be repayable based on the market value of the property when you sell it.”
Does this loan accord to the Sharia?
Answer:
According to Shariah, when a loan is given, it is unlawful to demand in return more than the actual quantity and magnitude of the loan. It will be unlawful to demand the value of the loan in return, for that will constitute Riba.
The Messenger of Allah (Allah bless him & give him peace) said: “Do not sell gold for gold unless equal in weight and do not sell silver for silver unless equal in weight. Whosoever gives or demands more, then this will be interest.” (Recorded by Imam al-Bukhari, Imam Muslim and others)
This and many other similar narrations imply that, when exchanging, there should be total equality in quantity and measurement. If it is a loan, then this becomes more necessary. This was explained in detail in an earlier post regarding inflation-adjusted loans.
Thus, taking a home equity loan which will be payable according to the market value of the property at the time of selling, is nothing else but Riba. If you take out a loan of £20,000 from the financial institution, and then repay 20% of the market value of the house, then this will mean you are paying more than what you actually received.
For example, you purchased the house at £100,000 with a loan of 20,000 from the creditor being the financial institution. Now, if at the time of selling the property, the price of the house doubled and became £200,000, then you will be paying £40,000 in return of £20,000, which without doubt is Riba, thus unlawful.
The solution to the above could be in the creditor having an ownership in the property to the value of its investment. For example, you take the loan of £20,000 from the financial institution and give them the ownership of 20% of the property presuming the property is purchased at £100,000. Now, when the property is sold, the institution will be eligible to receive 20% of the actual price, thus if the property was sold at £200,000, the creditor will receive £40,000.
This will be permissible, for the creditor (or the financial institution) is receiving its profit on bearing the risk of loss. If some damage was to happen to the property, the loss will be borne by both parties according to the ratio of the ownership.
And Allah knows best
[Mufti] Muhammad ibn Adam
Darul Iftaa
Leicester , UK