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Yeranuhi Hovhannisyan, a dentist, took out a mortgage of $29,000 when she bought a three-room apartment in Yerevan’s Arabkir district five months ago. The apartment cost $42,000.

Hovhannisyan is satisfied with the service she got from Artsakhbank, but says the annual interest rate of 16.5 percent combined with the short payoff period of six years is a burden.

“Mortgage is a good thing if the interest rate was not so high in Armenia,” she said. “I didn’t have such a large sum of money to purchase an apartment and I can’t save up either because property prices in Yerevan are increasing from day to day.”

Under a program being set up with the help of Germany, Armenians could find buying a home a little easier. Later this year, the German banking group KfW will provide a 6-million-euro ($7.2-million) credit to banks in Armenia to expand the country’s mortgage loan market.

Armenian Minister of Finance and Economy Vardan Khachatryan and German Ambassador Heike Renate Peitsch announced the deal on March 3, the same day they signed an agreement on credits and grants to be provided by Germany.

According to Khachatryan, the German credit allocated for mortgage loans will be issued at low-interest rates to several banks that meet the criteria of the fund established by the Germans and the RA Central Bank. The rates for the new program have not been set.

“This credit will promote the organization of a mortgage market in Armenia and will provide an opportunity for longer-term mortgage loans at lower interest rates,” Minister Khachatryan said.

Karapet Gevorgyan, local representative of KfW, said the deal would expand home ownership to a broader segment of the population.

“It is not a secret that today mortgage loans are mainly issued to employees of international organizations or the same bank’s employees -- that is, loaning takes place within a closed circle,” Gevorgyan said. “Through this credit we will attempt to break that circle.”

The United Nations estimates that 40 percent of Armenia’s population requires additional living space and needs to improve the sanitary conditions of their homes.

Economists and estate agents say expanding home ownership in the middle class will boost the republic’s finances and contribute to the overall economic health of the country. (See “Buying, Renting, Selling: The deals are easy but not cheap in Armenia.)

Of the 21 banks currently operating in Armenia, 13 offer mortgage loan services – Armsavingsbank, Armeconombank, Armenian Development Bank, Artsakhbank, Areximbank, BTA Invest, Inecobank, HSBC Bank Armenia, Cascade Bank, Converse Bank, Mellat, Prometey and Unibank.

Mortgage loans are also issued by large crediting organizations, such as First Mortgage and Washington Capital.

The annual interest rates set by banks for mortgages fluctuate between 15 and 17 percent, which are issued on the average for a period of five to seven years. Bankers attribute the high rates to the newness of mortgage loans – Armenia’s first mortgages were issued in 2001 -- and the relatively small pool of money available to loan.

In more mature markets like the United States and Germany, a mortgage loan is issued for an average of 20-30 years at a current annual interest rate of 4 to 8 percent.

The lowest-interest loan in Armenia (11 percent per annum) is issued by HSBC Bank Armenia with a repayment term of up to seven years, and the highest is issued by Areximbank at 24 percent for 18 months.

As in most countries, Armenian mortgage customers must meet a set of requirements to qualify for a loan, including employment verification and proof of insurance. But some Armenian banks also require personal references and certification that the customer is in a good state of mental health.

Most banks will not provide loans for housing outside of Yerevan.

Even in the presence of such conditions bankers argue that the mortgage market in Armenia is developing step by step. According to HSBC account for 2004, in that year the bank allocated mortgage loans of $4.4 million to more than 140 customers, which was about six times as much as the money loaned in 2003.

Nevertheless, high interest rates set by banks are a reason home buyers avoid using banks and stick to traditional methods – borrowing from relatives at lower interest rates or with no interest at all, or personally signing a lower-interest contract with the seller.