JEDDAH, 16 August 2007 — Bassam Bahamdan, a young Saudi working in a hypermarket in Jeddah, was shocked when he realized that he would end up paying three times the value of the house he plans to buy by borrowing money from a bank if he took 20 years to pay back the loan.
He realized that 40 percent of his current paycheck would go each month to make loan repayments. On top of that he would have to find somebody working in the government sector to co-sign on the agreement with the bank.
According to a report in yesterday’s Al-Madinah newspaper, eight million young Saudis searching for a house share Bahamdan’s situation. According to statistics, 70 percent of Saudis does not own homes and are searching for easy and reasonable mechanisms for house financing.
Banks earn about 4.75 percent interest each year on housing loans. (Saudi Arabia has yet to implement a mortgage system and homes are bought through conventional bank loans.) This means a SR375,000 property purchased on a 20-year repayment plan will end up costing SR731,000, or about SR17,800 per year.
Other payment plans have higher interests.
“Our company provides easy loans to customers even if the customer has other loans from banks or installment companies as long as the installment payment does not exceed 30 percent of his salary,” said Shaddad Fakhri, sales supervisor in Al-Mutajara Installment Company in Riyadh.
“In the Saudi loan market, each company is competing to provide the best of service. The interest rate is different from one company to another. In our company we calculate the interest according to the number of years and the value of the product. We do not have a standard interest rate because that would kill our competitiveness,” said Fakhri.
A media representative at a big local bank who did not want his name to be mentioned said that the housing loan is a tough issue in Saudi Arabia. He says that banks have more credibility over installment companies because they guarantee the rights of the customer and the loans are dropped in case the customer died.
“If a person lives in a rented apartment for SR20,000 a year, in 20 years he would end up paying SR480,000, which is very much the same as if he took out a loan. It’s better to pay the money in something that he will own in the future,” he said.
