In an effort to minimise long-term risk as well as household debt, the Central Bank of Iceland has adopted a maximum debt sevice-to-income ratio of 35% for borrowers and 40% for first-time buyers. The Central Bank lowered interest rates throughout last year in response to the pandemic recession, allowing many homeowners to refinance their debt or purchase more real estate. House prices rose as a result, and that “has gone hand-in-hand with increased household debt,” according to a statement from the Bank’s Financial Stability Committee.
The statement says that Iceland’s economic recovery over recent months has “supported household and businesses. On the other hand, asset prices – equity securities and real estate prices in particular – have risen markedly.” The position of Iceland’s three main banks is strong, with their capital and liquidity “well above regulatory minima,” making them resilient, the Central Bank says.