Question

You’ve got lucky and about to get married. You are looking for an apartment to buy. Your savings from your stipend is SR100,000 which you will pay as a down payment (initial) for the apartment. The apartment cost is $400,000 in cash. You would like to mortgage the apartment in 4 years. You have two options:

• Saudi Banks: takes 2% annual interest on the whole loan.
• US Banks: takes 6% annually on remaining principle.

Compare the two options. From a sole economic point of view, which option shall you go with?

Answer 1

SR is fixed with US Dollar since 1986 : 1 Dollar = 3.75 SR

Apartment cost in SR = $400,000 * 3.75 = 1,500,000 SR

Down payment of SR 100,000

Loan Amount = SR 1,400,000 or $ 373,333.33

Mortgage Term : 4 Years

Option 1 : Saudi Bank 2% Annual Interest on full Loan

Annual Interest = 2% of SR 1,400,000 = SR 28,000

Total Interest for Full Term = SR 28,000 * 4 = SR 112,000

Option 2 : US Bank 6% Annual Interest on Remaining Principle

Total Interest for Full Term on Reducing Balance for $373,333 @ 6% = $47,518 * 3.75 =SR 178,194

So from Economic point of view Option 1 Saudi Bank 2% Annual Interest on full Loan is better option