pay cash for a house or take out a mortgage?

puddy

i dont really understand the muslim mortgage set up, do middle eastern banks make the same sort of profits as western banks and if so, how do they do this without charging interest?

is it from the 'rent' section on the payments, so the borrower pays monthly a part stake in the capital and 'rent' as well, sort of like shared ownership?

however, with regard to the original question, if the parents buy the home and the neice pays rent to live there, its just the same as the muslim mortgage but without the middleman isnt it? how and why would the parents have to pay tax on the income when its a loan? i agree that capital gains tax would still be necessary

poppysarah

http://www.bbc.co.uk/religion/religions/islam/living/mortgages.shtml
This explains Sharia Compliant mortgages.

Eyesparky

jenner wrote: »

i dont really understand the muslim mortgage set up, do middle eastern banks make the same sort of profits as western banks and if so, how do they do this without charging interest?

is it from the 'rent' section on the payments, so the borrower pays monthly a part stake in the capital and 'rent' as well, sort of like shared ownership?

however, with regard to the original question, if the parents buy the home and the neice pays rent to live there, its just the same as the muslim mortgage but without the middleman isnt it? how and why would the parents have to pay tax on the income when its a loan? i agree that capital gains tax would still be necessary

Ownership is the difference. Concessions have been made with Muslim mortgages that mean that stamp duty is paid only once (historically it needed to be paid at the outset and on completion of the term). The scenario outlined by the OP would have ownership in the parents name. This would have major implications around capital gains tax (not principle residence), inheritance tax (the gift of £30K now towards a deposit starts the 7 year clock now whereas transferring the house a number of years from now starts the 7 year clock then). There may be the possibility of the parents giving them £30K now and an interest free loan for the remainder with the house being in the daughter's and her husband's names. If they are not interested in a return on the money to match a savings account (which it seems they would be happy to fore go) then the tax situation would likely be fine. Obviously this is a situation of total trust as no capital is held in the property by the parents ... if they structured it like a religious mortgage, keeping partial ownership, then there would likely be tax implications.

JayZed

I agree that it would be a good idea for your neice and her husband to look into a sharia-compliant mortgage. It's designed for precisely this kind of concern (specifically the Islamic prohibition on the paying or receiving of interest. No reason why a Christian with similar religious concerns shouldn't take one out.

I hadn't realised that there are Christians who are opposed to debt - perhaps there's a marketing opportunity for the banks that provide sharia-compliant mortgages!

There are a number of tax-related problems [edit - as outlined above by Eyesparky] with the plan for your sister to buy a house and then transfer it into her daughter's name as the "debt" is paid off. If they do go down that route, they would need to get professional tax advice, and I suspect that they'd find that it ends up costing them more than it otherwise would.

puddy

poppysarah wrote: »

http://www.bbc.co.uk/religion/religions/islam/living/mortgages.shtml
This explains Sharia Compliant mortgages.

doesnt this method result in the bank losing money? if a couple buy a house via this mortgage for 100k, they put down 30k and own a third of the house, and the bank owns 2/3rds. over 20 years, they pay rent to the bank and an amount to increase their equity in the house.
BUT by the time they have paid off the equity and own the other shares of the house, the house is now worth 150k,,,, so how do the banks make their money,,, or are they less profit focused than the likes of barclays etc??

getmore4less

Do they think it is OK to lend money and get interest thats what putting it in a bank is?

Anyway.

this is how I see it

Sis gives them the £90k and let them get the place but then they can't pay it back it would have been borrowing, the sister would have to save up to give the other kids.

If they don't give them the money and sister buys the place and lets them live in, there is no debt to pay back so any money paid will be seen as related to the purchase(rent) and potentialy taxable as well as potential CGT on transfer.

Another option is to let them live there and transfer on death( I dont think there is CGT on death) but then they can't move.

If they do buy the place then an offset mortgage could be a good idea and go 100% offset with the savings, then sis can get the money out when the other kids need their shares.

Don't forget sis will be subsidising the purchase so if she wants to treat the kids equaly she will need to do the similar for the others.


Seems a but silly to me it is OK to rent a house, lease a car etc but not money.

hilla_2

jenner wrote: »

doesnt this method result in the bank losing money? if a couple buy a house via this mortgage for 100k, they put down 30k and own a third of the house, and the bank owns 2/3rds. over 20 years, they pay rent to the bank and an amount to increase their equity in the house.
BUT by the time they have paid off the equity and own the other shares of the house, the house is now worth 150k,,,, so how do the banks make their money,,, or are they less profit focused than the likes of barclays etc??

presumably the rent they pay is enough to cover interest payments in an ordinary mortgage.

Eyesparky

jenner wrote: »

doesnt this method result in the bank losing money? if a couple buy a house via this mortgage for 100k, they put down 30k and own a third of the house, and the bank owns 2/3rds. over 20 years, they pay rent to the bank and an amount to increase their equity in the house.
BUT by the time they have paid off the equity and own the other shares of the house, the house is now worth 150k,,,, so how do the banks make their money,,, or are they less profit focused than the likes of barclays etc??

I believe they make money from the rental on their portion in effect being a margin above the cost of money. Externally rent appears very much like interest on a traditional mortgage but behind the scenes there is a different structure to the way the money can be raised with most of the Islamic banks raising money from depositors and investors and a set of principles around ethical sources of finance. I also believe that many mainstream banks like Lloyds and HSBC are now offering compliant products. It is an interesting subject, particularly at the moment, as due to a conservative lending approach and the way they fund their loan book, many of the Islamic banks are not heavily exposed to credit crunch or the torment of the money market. Of course the same could be said of institutions like the CoOp who have similar ethical investment and conservative lending profiles.

hilla_2

Thank you everyone for your replies. My sister has just logged on to MSE (for the first time) and is very grateful for your knowledge and helpful comments

Fire_Fox

hilla wrote: »

the house will be in my sister and brother in laws name but they will just transfer it to them when they have paid back the £60000.

If my sister buys the house and my niece pays £500 a month would the taxman want his slice? Isn't it just like me giving my son £60000 and him paying it back to me at £500 a month. If they don't take out a mortgage they aren't getting any tax relief on the money so it could just be a private arrangement. Would there be any capital gains as they will just give them a house in the end.

I am not getting this ...
1. Your niece and her husband don't want to owe anyone any money for religious reasons. So they will rent a house off her parents. If that is the case then the rent is liable for income tax.
OR
2. Your niece and her husband don't want to owe anyone any money for religious reasons. Her parents loan them the full amount to buy a house, and the kids pay the loan back in installments. No income tax due BUT the kids owe someone money?

So what happens if the children are unable to pay the money back - multiple birth, redundancy, accident or illness? Do they claim housing benefit for their rent?