Planit:Riba-Free Mortgage Case Study

Example Problem Three: Riba-Free Mortgage:

Your client wants to purchase their first home with a value of RM 300,000. They have seen their bank and come to a tentative agreement to obtain this RM 300,000 now, if he were to pay RM 370,000 back to the bank over 25 years. He would be making equal monthly payments.

What would his monthly payment be?

What would the balance of the mortgage be after 10 years?

Solution Using Present and Future Values Calculator:

1. Select Present and Future Values from the Calculators drop down on the home page.
2. Click on the radio button to indicate Simple Annuity
3. Leave the Periodic Payment blank, since this is what we are calculating for.
4. Select the Frequency as monthly, since he wants to make monthly payments.
5. In the Number of Payments field enter 300: 12 payments/year times 25 years of payments
6. In the Interest/year field enter 0%
7. The payments are not going to be indexed, since the agreement would then have to be re-drawn, so the Index Payments per Year can be left at 0%
8. Set the Future Value to $370,000: the amount that the client needs to pay back.
9. Click on the button next to Periodic Payment.

The result should be $1,233.33

1. To find the balance of the mortgage after ten years, first click the Schedule button.
2. Scroll down to Period number 120: 12 months/year multiplied by ten years.
3. Note the number for this period under Ending. This is the amount that your client will have already paid to the bank after ten years.
4. To find the balance, calculate the total value of the amount owed to the bank – the amount already paid after ten years. ($370,000 - $147,999.60 = 222,000.40)

The balance of the mortgage after ten years would be RM 222,000.40.

Go to the exercise to test your knowledge on riba-free mortgages.