Question:
Is reverse mortgage (home equity release) permitted for Muslim homeowners to fund retirement needs?
Answer:
1. Understanding Reverse Mortgage (Home Equity Release)
A reverse mortgage allows elderly homeowners to borrow money against the equity in their home. Repayment usually occurs upon the homeowner’s death, sale of the property, or permanent relocation. The loan typically accumulates interest until repayment.
2. Evaluating Reverse Mortgages through Islamic Sources
A. Prohibition of Riba (Interest)
- Allah explicitly states in the Qur’an:
“Allah has permitted trade and forbidden interest (riba).”
(Surah Al-Baqarah, 2:275)
- Prophet Muhammad ﷺ explicitly warned against interest transactions:
“Allah has cursed the one who consumes interest, the one who pays it, the one who records it, and the two witnesses.”
(Sahih Muslim)
Since reverse mortgages inherently involve accruing interest on the loan balance, this clearly violates the explicit prohibition of riba.
B. Ambiguity (Gharar) and Risk
Reverse mortgages often involve uncertainty regarding repayment amount (interest accumulation over indefinite timeframes), clearly involving gharar (ambiguity), explicitly prohibited in Islam.
- The Prophet ﷺ explicitly prohibited ambiguous contracts (bay‘ al-gharar)
3. Scholarly Consensus and Islamic Jurisprudence (Ijma‘)
Contemporary Islamic scholars and Fiqh councils (AAOIFI, Islamic Fiqh Academy, AMJA, European Fatwa Council) explicitly classify reverse mortgages as impermissible due to interest accumulation and contractual ambiguity.
- The International Islamic Fiqh Academy explicitly ruled that all loans accumulating interest—including reverse mortgages—are prohibited due to riba.
4. Permissible Alternatives for Retirement Funding
Islam offers permissible alternatives explicitly free from interest (riba):
- Selling the property outright and downsizing.
- Leasing/renting part of the property for income.
- Islamic equity-release products (diminishing Musharakah) explicitly structured as profit-sharing rather than loans.
- Family-based financial support systems encouraged explicitly by Islam.
Final Scholarly Recommendation:
Reverse mortgages (home equity release) are explicitly impermissible (haram) in Islam due to inherent riba (interest) and ambiguity. Muslims needing retirement funding should seek clearly permissible, Shariah-compliant alternatives.