Jamal Badawi – Economic System of Islam 19 – An Alternate To Mortgage 1

			In the Name of God, the benevolent, the Merciful, the creator and Sustainer of the universe, peace
and blessings upon his servant and messenger Muhammad forever. I mean, I bear witness that there is
no god worthy of worship except the one true God. And I bear witness that Muhammad is the messenger
and servant of God, I greet you, our viewers of the Islamic focus program with our usual greeting,
the universal readings of peace, a greeting that has been used by all of the profits from Abraham
through the prophet Muhammad, peace and blessings be upon the mall. Assalamu Aleikum, which means
peace be unto you. many Canadians are facing a mortgage dilemma, especially those who are having
		

			mortgages, which will come up for renewal. The high interest in the economy at the present time is
wrecking havoc. There have been many suggestions that have been offered, but few offer any real
relief. And today's Islamic focus program, we'll be talking about an alternative what we considered
to be a viable alternative to the dilemma that is faced by many homeowners. I'm your host, Hamad
Rashid, and I have joining me on the program as usual, Dr. Jamal battery of St. Mary's University.
		

			Assalamu aleikum wa
		

			mentioned that today's program will be a special program, we're going to be talking about a program
which you call sir, or shared equity in a rental program, an alternative method of home ownership,
before we go into the
		

			finer details of the program, but you just in a nutshell, perhaps give us an overview of what the
web server is all about. Okay, perhaps we can use that by referring to the fact that itself it's a
sure equity, and rental as an alternative for homeownership in a way that it is a substitute or a
possible alternative to the traditional method that we have used for too long in homeownership. And
that's through mortgage loans,
		

			which involves interest. And that's another problem
		

			is shared equity, in a sense that instead of investors giving a loan to the person who's going to
own the home or to the homeowner, instead, they are really investing in shares in his home.
		

			That means then that they would be entitled to some shares also, of the appreciation of the value of
the property.
		

			We call it also shared rental, it's shared equity and rental. Because both the home owners, as well
as those who contribute the cash to buy the house, or to retire the mortgage, whichever the case may
be. Those people are also entitled to some shares in a fair rental value, which would be charged to
the homeowner, it truly is eventually going to be the homeowner but since other people are holding
shares in his home, will also get some share of the first rental income as time goes on. This
system, sir is designed in a way that it would also allow the homeowner to gradually build up his or
her equity as time goes on, or he will just continue paying rent. So to help him also build up his
		

			equity can buy shares as time goes on, which means also that the amount of rental he has to pay for
other investors would gradually decline at least proportionately in terms of percentage.
		

			Now you've gone to church, which I think might be proved to be very useful in terms of grasping the
concept. Could you perhaps take us to those charts and show us the how in specific figures the the
program works? surely going to the best chart here.
		

			We have a number of steps that if you go through them very easy,
		

			you can easily grasp the system.
		

			And the first step
		

			you have to find out what is your own equity as an owner.
		

			Of course, this house could be for example, a house which is coming up for renewal, let's say. So,
you get the fair value by getting some appraisal of the property. The assumption we have
		

			Have an bedsheet that suppose that your value is $50,000. Alright?
		

			Suppose also that you want to retire a mortgage
		

			on the property, which comes to $30,000. All right, it means then that you hold an equity in that
house. And based on the fair market value equivalent to the difference between 50,040 1000. And
that's roughly 10,000 $10,000. Exactly. All right.
		

			Now, notice here, before we move to the second step, that we are not talking about equity, as
interpreted by mortgage companies, which is usually your contribution to the principal, not of the
fair market value, but in this system, we're talking about an equity based on the fair value of the
house. Now, moving to the second step,
		

			you can simply divide this market value into shares, if the house is worth 50,000. Suppose you
decide that a reasonable amount for the shirt would be a reasonable price for the show would be
$1,000.
		

			That means then, that the value of the house can be represented by 50 shares, yes, $1,000 each,
okay.
		

			It follows from that, then, that, if we move to the following
		

			step in Step three,
		

			that you can simply sell
		

			those shares in step three to other investors, who would be interested to buy those shares.
		

			How many investors This is a matter that it depends on the needs of people involved, their financial
and financial capability, for example, the 40,000 could possibly come through 10 investors, putting
$4,000 each, for investors putting $10,000 each or whatever other method, the beauty about the
system that it is very flexible. And you can apply it among a group of friends, church group, club
group, or whatever other groups that can provide or raise this amount of money. Now what to do with
this $40,000 that is indicated in step four, on the chart here, just use that money to retire the
mortgage.
		

			You'll notice here we have between brackets, or buy a home, because that system could apply to the
case of mortgage that you want to get out of, or the case when you want to buy a house. In this
case, for example, suppose you have $10,000 in cash, which is your equity, and you need 40 more
$1,000 to buy the house you simplify by providing this funds or paying this funds. Is that clear? so
far? Yes, in terms of just the division of the shares. Now the question which comes next?
		

			What kind of benefits? Would the investors get? wet?
		

			winter, we talked about now shared equity, how about shared rent and how do they share the rental?
Now, if we refer back to Step five,
		

			you'll notice here that it starts with a determination of the rental value of that property. In
other words, suppose that house which is worth 50,000, market wise,
		

			is rented, of course, as most homes are rented without heat or other utilities, right.
		

			And suppose the fair rental estimate is estimated at $450 per month, multiply that by 20. That gives
you the anyone rental that the homeowner has to pay to all those who share on chairs. The amount
here is 50 $400. Okay. Now, since the whole system operates on the concept of sharing, it follows
then that basic expenses, I'm not talking about utilities, basic expenses, like for example, taxes,
insurance should be shared by all shareholders, it shouldn't be left to the homeowner alone to pay.
Okay. Now, because when you rent a home, for example, you don't pay the taxes load up the insurance.
This is the responsibility of the landlord. In this case, we have several people who have shares in
		

			the house.
		

			Now, when you deduct the 900, the chart here shows 40 $500 as net rental income for the year. Now if
you divide that by 50 shares, it comes to $90 per share. So the one income for investors would be
$90
		

			For each 1000 that are shared by way of sharing in Denton,
		

			okay. But notice here, that under this system, the home owner does not have to pay all these 30 $500
to the investors. Why? Because he himself also hold a number of shares, right? In our example, that
was how many 1010 shares, which means then that he can deduct out of that rental, his own shares,
		

			one fifth or 10 out of 50 shares. So, that's $900 it means then that the net cash that he has to pay
out to investors for the shares is 30 $600. That is 40 shares by
		

			$90 each.
		

			Okay. Now, the main question here that you find in Step six
		

			is the common question, how much am I going to my I'm going to pay as a homeowner.
		

			Right. Now, there are two types of payments that the homeowner would have to make. The first element
we talked about is the
		

			the investors chairs and rental value the 30 $600. But if the owner pays only the rental value,
		

			it means that he cannot build up his equity,
		

			he will just remain forever owning only 10 shares. So the assumption is made hear that he buys back
		

			three shares every year.
		

			And that would go towards his principal. So that's why we have in the second line here on the web,
the honor case plus the price of three shares, we can assume that in the first year, you can just
price the shares, as it was priced at the beginning of the year $1,000 per share. So that gives them
$3,000. The total comes to 60 $600 total payment, which means that the monthly payment would come to
$550. And still, the homeowner gets $3,000 to his principal, or on three more change. Now the plan
sounds certainly to be quite an attractive one from the homeowners perspective that's relevant to
the situation of the investors what advantages or or prophets can they get from participating in the
		

			program? Well, I definitely agree with your brother habit that the system is far superior from the
point of view of the homeowner than the conventional mortgage system. Suffice to say that, in that
system, the first year, year one of the operation, the owner is getting fishers to his principal.
And as you know, under mortgage payments, most people would pay 1000s of dollars in monthly, you
know total monthly payment in a year and get only a couple of $100 going to the principal, if you're
lucky to get that in the first year, right? Especially in the in the years, it doesn't really grow
like that. But the from the point of view of the investor, he's not losing either.
		

			We're simply eliminating middlemen from the operation. From the point of view of the investor, he's
getting a 30 return on his income. *, number one, he's getting already the shirt in rental value.
For each shirt that the person invested, he's getting back in the first two years $90 by way of a
profit, which is the search invented value. But that's not all. The second aspect of it also is that
as we mentioned earlier, the system works on sharing in both rental as well as the equity which
means that if the value of the property goes up, which is the normal case, then the investor also
would be entitled to reap some of the benefits of the appreciation of the value of that property. In
		

			other words, the value of the shares that he holds becomes greater. So he is also some of that
benefit. So there are two ways
		

			of benefiting the certainty in this case, for example, $90 per share comes to about 9% is nothing
less than less than 10%. Right? And you know, also that the appraised appreciation in the value of
the property usually is not less than 10%, if not more, so he goes both ways. Attempts to be very
conservative estimate for appreciation. Oh, yes. But
		

			everything be interesting to explain specifically how the investors the share and the appreciation
of the property. Do they have to wait till the end of the contract to collect the appreciation or is
it something that we get on an annual ongoing kind of basis? No, they don't. And that's how this
this system is different. For example, from
		

			A system that is based also on shared equity, but you have to wait until the property is sold, or
the contract is finished to collect. Because the systems also involve interest in just reduce
interest in return for some shares and equity, this system is totally different because there is no
interest in whatsoever involved.
		

			Following the same assumption that you had before that suppose you
		

			as a homeowner, in addition to the payment of rent, you're also buying back the shares.
		

			When you buy those shares, for example, in the second years, and every subsequent years, you will
not be buying the shares
		

			the price original price of 1000 dinner, because at the beginning of the second years,
		

			the property value would go up. And let's assume again, 10%, which means that the value of each
shares will go up 10%. So when you as a homeowner want to buy that and return this money back to the
investors, you will not be paying 70 retain 3300. So that's, again, an immediate reaping of benefits
in addition to the rental value that you're getting from the owner. So we're getting both types of
income incomes on a graduate.
		

			Can you give us an illustration of what happens in the subsequent years after the first year? Well,
perhaps by deferring to the second chart,
		

			we can see exactly how the steps you know can be followed to determine and resolve all these issues.
First of all, in step one, we have the new fair value at the beginning of year two, the assumption
in this model is let's say an increase of 10%.
		

			So that gives 55,000. Because the original price was 50.
		

			It follows then that the equity to stick to the new Share Value grows also by 10%. Because you
divide the 55,000 by 50 shares, the number of shares by the way remains the same, the only change is
changing hands as to who holds the shirt, it is only the value of that share that keeps changing. So
you get the 11 $100 as a price for the new price for the shirt.
		

			Now, you go also to the rent value,
		

			new arrangement, new furniture rental value, again is assumed that the mother to increase by 10%, as
we see in Step three, which means the income would be $5,950 per year.
		

			But like we mentioned before, also you have to deduct from that rental value, the basic expenses,
namely taxes and insurance. And we assume also that it's done by 10%, it may not necessarily go by
that much. But suppose you do invest, when you deduct the new expenses, which is 990 out of the
5940. That gives you the net rental value and the chart in step five of $4,950 that comes to $99 per
share, if you divide that by 50 shares, it comes to $99. Now, you might say that the shirt here is
more than the shirt in the first year, in the first year, the first and the shirt in the center
value per shirt was not $90. Now it's 99. But the percentage is approximately the same, because the
		

			value of the share has gone up also. So it's 99 on 11 $100 investment. So it comes to the same
percentage in that particular case, which is 9%.
		

			And step six, there's something interesting that
		

			we said before that out of that net rental value, let's say in this case, $4,950. The owner does not
have to pay all of that to the shareholders, because he himself also is assured that he holds a
number of shares. That what happened here is that the proportion of lengthen that he has to pay to
others will decline because he owns now 13 shares instead of 10 which means that his share out of
that amount would be 4950 multiply it by 13 shares divided by 50 the total number of shares.
		

			So that would be his share, here's $1,287 it follows then that what he he has actually to pay to
investors in step seven
		

			is their shares for 37 shares that they are holding which comes to $3,663
		

			case apart. Now, as we mentioned before, he has also to buy some additional shoes
		

			In order to acquire more equity, this time, suppose it continues to be three shows a year, he would
have to pay to buy the three shares at the new price, which is 11 $100. So that gives you $3,300.
		

			Just add up these two, it gives you a total
		

			payment of $676,963, which comes to a monthly payment of $580. If you follow that system through,
you do the same thing repeated in year three, calculate again, the additional or the new fair value
of the price of the of the house and then go on to the fair value or new value of the shirt, just
follow the same thing, every time increasing the actual increments in the value or expenses or
whatever other whatever the case may be. I felt that calculation so and at that particular rate of
acquisition of equity, you could own the home fully in year 14.
		

			Now, I noticed that
		

			as we're going through that the rental in the second year,
		

			the monthly payment is a little bit higher than in the first year.
		

			As time goes on, is it possible to stabilize the monthly mortgage payment, you could do that without
any problem.
		

			If you wanted to stabilize and separate, I can't afford to pay for the next five years anything more
than $550 a month which we used in the first chart. By all means, it simply means that in year two,
		

			in order to keep the payment within that limits, you do not have to buy really three shares, you
might buy for example 2.8 shares,
		

			you see the point, so you can buy less at a slightly lesser number of shares and standardize the
monthly payment. However, when I made the calculation through for the 14 years,
		

			I found that the if you follow that system, it might be more advantageous to you as a homeowner. Why
because you can acquire equity faster. And as such reduce the amount of rent that you have to pay to
other investors. This is one advantage. And secondly, the increment was not really that great. You
have noticed, for example, from year one to year two, it increased on the back 30 vendors, I looked
through the figures and it appears to be within the limits of
		

			five to 6% more than your payment in the previous series, which of course is much less than what
most people would get by way of the increments in various income or centers. So actually, if the if
the homeowner can afford it, it might be better actually, with a slight increase in the monthly
payment to acquire
		

			his equities, buy more shares faster in order to reduce his burden.
		

			Now what about the legalities of the model? That kinds of lupa guarantees are there to protect the
person who invests in like?
		

			I think this is a very fair question because you can just go around to some friends or church group
or club group or whatever center and say, all right, would you please give me this money and you
know, there is no
		

			document or guarantee for that. Now this problem can be resolved easily. And in fact, it has been
tried more than once there is present
		

			property in Halifax area, which is under this system now. And what you do is simply to have a
document, holding the property as a collateral in favor of the investors until everything is paid
back to them. Well, officially, legally speaking, that's called a mortgage document. But again,
let's not mix the term mortgage here with the convention and sense of mortgage because when you talk
about conventional sense of mortgage, we're talking about a loan from the mortgage company, which
bears interest, which is you have to pay interest on it. But I mean here by mortgage is just the
legal term that the property is held in collateral, or as a guarantee to the investors. And this can
		

			be registered legally can go through a lawyer and it's not much permanent. And that was done
actually in the case that I mentioned earlier. The only thing that you might have to add to the
convention and wording of the mortgage documents that the house is in is held in collateral and all
that is to say that the payments are the method of payments of the amounts contributed by the
investors shall be determined in accordance with the Schedule A for example, and you F and you put
the F index with the with
		

			The mortgage documents, the specific details and clauses, which determine exactly the same thing
that we're talking about here, how the value would be the assessed how the new value of the shares
would be calculated, and all the remaining issues pertaining to the calculation of the system just
be attended to the, to the mortgage agreement. So to be guaranteed and registered official, of
course, with the registry of deeds. And I'm sure they're probably not there's probably another
aspect that people would be interested in, particularly from an investment point of view. And that's
the income tax implications of spending in the in the scheme. Could you perhaps comment on that?
		

			Well, that's an interesting question. And perhaps it might be a new issue, that we face the tax
department.
		

			Because the income that you were getting as an investor, not the homeowner, because that is first
obviously that you know, it's not recommended. But for you, as an investor, suppose you put $10,000.
And then at the end of the year, you get your shirt and the rental value, which is $90 per share,
let's say you get
		

			$900.
		

			How to how to report that for income tax purposes. Like I said, I think this is a method that, you
know, we have to get a ruling from the tax department on it, but it appears to me that it can be
dealt with in one of two ways.
		

			One, it could be regarded as income on investment,
		

			something similar to doing it in South Africa, because that's basically what it is it could be
regarded as such. And if that's acceptable to the tax department, it would enjoy, of course, the
deduction, which is allowed for interest and or dividends. That could be one way of looking at it.
In fact, even though it's not interest,
		

			it may be regarded as the closest thing to interest and there was a possibility also that it may be
dealt with as interest income. This is like I said, again, no matter for tax people to live on.
		

			The other possibility is that the investor could also report that as rental income, but not the home
owner because the homeowner, of course, is staying in the home. So it's not really a two income to
him,
		

			that other investors will receive this $90 a share, let's say in the first year, you can report this
as rental income, which is charged to the home owner. And in the meantime, they can also deduct from
that total income, the depreciation which is again permissible in
		

			many cases. So these are the three possible ways in whichever way you look at it, it would not be
probably less advantageous than any other type of income that you might be obtaining by way of
investment or other ventures.
		

			Very exciting concept, the idea of shared equity, and rental, we've exhausted our time for today, we
want to invite you back. Next week we will continue with the second part of our program. And in that
program, we will talk about some other
		

			important questions to deal with such as the question of resale of the property, the cost of
maintenance and so on. In the meantime, if you want to get more information on what you've heard
about today, you can contact Dr. Jamal Baddeley, either through the station or at St. Mary's
University, or by calling 4452494 Thank you for watching Assalamu alaikum peace