Who is the Real Borrower?

Question

Chayim recently got married. He wishes to buy an apartment,
but needs a substantial mortgage to complete the purchase. His father is a
well-established businessman, who has good connections with the bank.
Chayim’s father is prepared to take out a mortgage on his own name, with
Chayim making the monthly mortgage payments directly to his father’s
mortgage account. However, he is concerned that such an arrangement should
not infringe the laws of ribbis (lending money to a fellow-Jew with
interest). Is their any problem with this suggestion?


Answer

Looked at superficially, we could conclude that this
arrangement does not raise any problems of ribbis. It is really
Chayim who is borrowing the money, but using his father’s connections to
obtain a substantial mortgage on good terms. However, the truth of the
matter is that this is not the case. Let us ask just one question: At the
end of the day, who does the bank hold responsible for repayment of the
mortgage loan, Chayim or his father? It is standard practice to make the
borrower sign a note, whereby he assumes personal responsibility
for repayment of the loan. Thus, even though Chayim’s apartment is
security for the loan, Chayim’s father is the one who will ultimately be
held responsible for payment. He is therefore considered the borrower. (He
does not face any problems of ribbis in taking out the mortgage if
he either borrows the money from a non-Jewish bank or a Jewish bank which
operates under a valid heter iska – a document which converts the
apparent loan into a joint business venture.) As a result, when Chayim
receives the mortgage money, he has received a new loan from his father.
Since this is a loan between two Jews, it is forbidden to make (or
receive) any interest payment. It is therefore forbidden for Chayim to
make mortgage payments on behalf of his father, since he is in effect
repaying the loan he received from his father with interest.

Is there no way that Chayim’s father can assist him
in this way? There is a solution. If Chayim transfers ownership of the
apartment to his father by means of a valid kinyan (halachic method
of acquisition), he can then rent the apartment from his father. There is
then no problem if (a) the monthly rental payments equal the father’s
mortgage payments or (b) the father requests that these payments are made
directly to his mortgage account. Since the son is no longer the owner of
the apartment, it is the father who has borrowed money to purchase his own
apartment. That he finances his monthly mortgage payments by renting out
the apartment to a tenant who happens to be his own son does not render
those payments ribbis! After all, he is only paying rent. A
landlord can direct his tenant to pay the monthly rent to whichever
destination he prefers. Indeed, Chayim (or any other outsider) could
voluntarily make the father’s monthly mortgage payments to the bank.
Since he has no obligation to repay a loan, he is merely making a gift to
Chayim’s father, which is permitted.

There is another common situation which involves this
problem. Reuven sells his house to Shimon. Reuven received a mortgage on
very favourable terms when he originally bought the house, which still has
many years to run. Shimon would like to take over this mortgage, making
the monthly payments to Reuven’s account. However, such an arrangement
would be forbidden according to the halochoh, as explained
above. Since Reuven remains ultimately responsible for repayment of the
loan to the bank, Shimon is now deemed to be borrowing money from Reuven.
He may not repay the loan with interest, which is what he would be doing
by making monthly payments to Reuven’s account.