Maximum mortgage level cut

15.06.2022 - 15:09
Mynd: Haukur Holm / RÚV
The Central Bank of Iceland has lowered the maximum legal mortgage amount on properties for first-time buyers from 90 percent to 85 percent. The maximum loan for other buyers remains unchanged. The change is slated as a reaction to increasing property prices and the high debt burden of young people.

The Central Bank financial stability committee announced its decision, first and foremost affecting first-time buyers, this morning. Central Bank governor Ásgeir Jónsson described the move as proportional and within the range of options available; saying it is important to ensure that growing economic activity is not accompanied by excessive appetite for risk.

Stopping people overburdening themselves

“The problem is first and foremost a shortage of availability. We are seeing a very big generation of young people who are coming onto the market. People who are joining the employment market and want to own their own homes. And there just aren’t enough properties,” Ásgeir says.

“We [the Central Bank] can’t react to that problem, but we are maybe preventing people from indebting themselves too much. Property prices have risen significantly and there is in some way a danger involved in entering such a highly valued market with large loans.”

But very few lenders offer 90 percent loans. How will this therefore change things?

“There is the provision for 90 percent mortgaging. You’re right: I don’t think any bank is directly using 90 percent loans. We just want to make sure people are not taking way-too-high loans when they buy properties.”

Could have side effects

Ásgeir says the side effect could be a lowering of property prices over time, but also higher rental costs.

“It is not unlikely that while we tighten the screws here with what people can buy, the rental market will rise. The basic problem is a shortage of provision. On the other hand, rental prices have not risen too much in the last two or three years—as interest rate cuts opened a way into the market in the past two or three years,” Ásgeir says.

The committee also decided to set a benchmark for interest rates when calculating the debt service burden, which will be a minimum of three percent for the interest rate on indexed housing loans and 5.5 percent for the interest rate on non-indexed housing loans. The maximum loan period for calculating the debt service burden on indexed loans will be shortened to 25 years. The changes take effect immediately.

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