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What Is the Difference Between a Mortgage and a Rent-To-Own?

Answered as per Hanafi Fiqh by Seekersguidance.org

Answered by Shaykh Abdul-Rahim Reasat

Question: Assalamu alaykum

In a mortgage, the bank buys a house in my name and I pay the bank the principal plus interest for using their money. On the other hand, in rent to own, the bank buys the property in their name and I pay them rent which includes the principal and the mark-up (interest). In essence, these two are the same so why is one seen as haram and the other halal?

A scholar has the opinion that the former is technically halal as the essence is the same.

Answer: Wa ‘alaykum as-salam wa rahmatullah wa barakatuh

I pray you are well.

Giving Interest Is As Wrong As Taking It

The premise that only taking interest is impermissible is incorrect, and it directly clashes with the narration ‘The Messenger of Allah (Allah bless him and give him peace) cursed the one takes interest, the one who gives it, the one who writes [the contract], and those who witness it.’ (Muslim).

‘Islamic Mortgages’

The conventional mortgage and the ‘Islamic alternative’ are two different contracts. The former is clearly one where the buyer pays back more than he borrows, falling into the problem in the above narration. In rent-to-own alternative, the buyer owns part of the property, and the bank owns the rest.

The buyer then has two agreements with the bank: the first is to pay a sum per month as rent for living in the share owned by the bank; this is permissible in the Shariʿa, and not interest. The second agreement is to purchase some of the banks share every month over a number of years until he is the sole owner. This is also permissible in the Shariʿa.

A simple look at the outcomes of the two transaction seems like the buyer is getting money from the bank and paying more back. This is a over-simplification and incorrect.

The Implications of words

The wordings and their meanings in legal contracts have consequences and sanctity in the eyes of Allah Almighty. Otherwise, what would be the difference between a man marrying a lady with a mahr and marriage contract and then consummating that marriage, and a man who made an agreement with a lady, paid her some money and slept with her outside of marriage? An over-simplification would say that both are the same.

The jurists summed this up with the legal maxim ‘In contracts the meanings are of consequence, not just the wordings.’ (Zarqa,Sharḥ al-Qawaʾid al-fiqhiyya)

I hope that clarifies matters for you.

[Shaykh] Abdul-Rahim Reasat

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