Commercial banks in Armenia and mortgage companies continue to review their mortgage loan programs and are proposing more favorable and longer credit terms for loans to purchase and renovate apartments.

When Armenian banks began offering mortgage loans in 2002 terms for apartment purchases included a 50% up-front deposit, annual interest rates of 18-24% and loan durations of five years. Today, the most commonly available terms are 10-15 year loans, annual interest rates of 12-16% and an up-front deposit of 30-35% of the apartment’s value.

Other indices also point to the development of the mortgage lending market. According to ROA Central Bank statistics, the total amount of mortgage loans granted by commercial banks and other lending institutions in 2005 was 11.6 billion drams; 25.4 billion in 2006; 57.9 billion in 2007 and 72.4 billion as of May 31, 2008. 

Mortgage experts note that changes to loan terms are not expected in the short-term. Mr. Davit Atanesyan, Chief Executive of First Mortgage, Ltd., states that, “Those financial resources needed to make loans, which banks and other lending institutions derive from both domestic and foreign markets, are becoming more expensive. Interest rates in the near future however will not experience sharp rises. Their average range should be 12-14%, but not lower. As for loan durations I can say that without the presence of a secondary mortgage market the 15 year payback periods of today are already impossibly long.”

Apartment Prices Continue to Rise

Mr. Gegham Gabrielyan, a broker with Alta VIP Realty, says that, “The market for apartments is primarily being driven by demand.” A survey conducted by the ROA State Committee of the Real Estate Cadastre in April of this year shows an average 21% rise in price for a square meter of apartment space in Yerevan. The following numbers show average prices for one square meter of apartment space in multiple residential buildings in Yerevan based on April 2008 contractual prices for apartment purchases in multiple dwellings and according to suggested prices offered by real estate agencies. (Figures in Armenian drams).

Mr. Gabrielyan states that, “Prices for one square meter of space in newly constructed buildings range from $1,500 to $3,000. Differences are based on the category of building.” Five categories of buildings are constructed in Yerevan - typical model, economical, business, premium and deluxe. The first two are not considered “elite” structures. They don’t include maintenance fees and are generally erected on the outskirts of town. The remaining three categories are considered “elite”. According to statistics of the Kalaksist Agency that deals with new construction, 25-30% of newly constructed buildings in Yerevan fall within the business category, with only 8-9 of the 190 newly constructed buildings falling within the deluxe class. For buildings to be considered “deluxe”, they must include swimming pools, business centers, separate laundry rooms, stores and other auxiliary services. The smallest apartments in deluxe buildings start at 130 square meters. The layout of apartments in deluxe buildings must differ but this isn’t always the case in Yerevan.

The Number of Mortgage Loans is Rising

During the last four years the number of mortgage loans taken out for apartment purchase, renovation and construction, has more than quadrupled. According to ROA Central Bank figures, the total number of mortgage loans granted in 2005 was about 3,000; 5,000 in 2006; 10,000 in 2007 and 14,000 as of May 31, 2008. Nevertheless, there are no accurate benchmarks regarding the internal dynamics of the mortgage market and actual loan demands.

In other words, it is not clear what percentage of the population actually has a need to either purchase or renovate an apartment. Even if it is known that there are 69 residential buildings in Yerevan in what is called a “3rd degree state of disrepair”, according to figures from the Mayor’s Office, what isn’t known is how many households rent their apartments and what percentage of newly married couples would like to become home owners. A government decision allows for mortgage loans to military service personnel and to university lecturers. Addressing various social needs through mortgage loans is a novel idea in Armenia.

Who Can Actually Afford a Mortgage Loan?

General wisdom has it that the middle class is the main consumer of mortgage loans. Even if mortgage loan terms in Armenia are more in line with the actual means at the disposal of the populace, they still do not correspond with the desires of many. According to information we received from the ROA National Statistical Service, covering January - June 2008, the average monthly salary in Armenia is 86,850 drams. A little over 62% of officially registered wage earners receive this salary. Only 19.6% of such wage earners receive monthly salaries over 100,000 drams. While outside sources of income can be taken into account during the loan process, it cannot be the sole factor in deciding who gets a loan since it is difficult for banks to verify the sources of such income and their future viability. The overriding factor when it comes to making loans is the total amount of wages by all family members. Mr. Atanesyan of First Mortgage Ltd states that, “Today, mortgage loans are envisaged for the upper middle-class, for those making more than 400,000 drams monthly.”

Diana Gaziyan’s family will soon celebrate the three-month anniversary of purchasing their new apartment with a mortgage loan. In her words, the decision to take out a mortgage was based more on need even though loan terms have become more accessible. Diana states that, “The mortgage market has developed and lending schemes are more varied than before. Thus, the chance of choosing the right policy has increased as well.” She has already resigned herself to paying off the loan for the next ten years.

She says that it was a tough decision to make. “Before we applied for the loan the stability of the country was a concern. In other words, we did not know what to expect down the road. Some changes you just can’t see coming. Even though I have no doubts regarding my own capabilities, who can say for certain what tomorrow will bring and whether we’ll be able to meet our monthly payments?” Diana and her husband mostly use their combined wages to make the loan payments.

Tatevik Aslanyan’s family has been renting their three-room apartment for the past eight years, currently paying 90,000 drams a month. “We’ve talked about taking out a mortgage to get an apartment for a longtime now but our family’s resources aren’t enough to make the substantial payments involved,” she states. Four of the five family members work in Yerevan in various private firms. The total family income is about 300,000 drams per month. When the income of one family member is not sufficient to secure a mortgage it is possible to apply as a family, where the combined incomes are pooled to satisfy eligibility requirements.

In their lending guidelines, banks advise their prospective clients to first take stock of their actual income levels and financial stability. Based on the case of the Aslanyan family, and utilizing the most favorable terms available in the market, we can note the benefits derived from taking out a mortgage.

Thus, taking into account the average price of one square meter of residential apartment space in Yerevan, the cost of a one-room apartment, averaging 50-60 sq. meters, is around 16.214 million drams. Banks generally require a deposit equaling 30% of the apartment’s cost. The deposit for the above average apartment works out to 4.864 million drams. The bank or mortgage lender, at an annual interest rate of no less than 12%, lends the remaining balance of 11.350 million drams out.

If the recipient takes out a 15-year loan, he or she would be obligated during the first year to make a payment of 1/15th of the principal (756,653 drams) plus an interest payment of 1.362 million drams (12% of the principal). During the second year loan recipient would again have to pay off 756,653 of the principal plus 1.272 million in interest. Third year obligations would include a 756,653 payment of principal plus and 1.180 million in interest (12% on the loan balance). Consecutive yearly principal and interest payments would continue until the entire loan is paid off.

For creditors to agree to grant a mortgage loan they must be convinced that the individual or joint recipients can allocate 30-35 of their monthly revenues towards paying off the loan. The Aslanyan household’s joint monthly income is 300,000 drams, 35% of which equals 105,000 drams. The banks and other lenders would deny their mortgage loan application. All other fees and expenses, no matter how small, included in the loan process must also be taken into account, for they all add up. For example, notary fees for property transactions and mortgage contracts can amount to 15-25,000 drams, 20,000 for the registration of private property and around 22,000 drams to obtain a certificate of collateral. Thus, these fees and expenses can amount to 80-85,000 drams. Generally, banks and lending institutions also require property insurance at an annual rate of .2% of the property’s value.

All 22 banks operating in the ROA plus 11 lending institutions now offer mortgage loans for the purchase and renovation of real estate.