Icelandic homeowners owe ISK 108 billion (USD 1.8 billion, EUR 1.2 billion) in total in foreign currency. Borrowing in foreign currencies has increased by 57.6 percent in the first nine months of this year, compared to the same period last year.
Of the ISK 108 billion, ISK 25.2 billion (USD 420 million, EUR 286 million) are mortgages, Morgunbladid reports.
The reason for this increased borrowing in foreign currency is the fact that such loans have much lower interest rates than loans in ISK; a 4.0 to 5.5 percent nominal interest rate compared to 12 percent nominal interest rate, respectively.
The foreign currency loans are not indexed; however, the opposite is true for almost all mortgages in ISK.
That means that if the ISK fluctuates, the principal of the foreign currency loans can increase, raising the burden of debt in tow, but the principal can also decrease.
Those who have loans in foreign currencies are subject to considerable risk, because the ISK is a rather unstable currency. By the end of 2005, for example, the ISK was very strong, but then its exchange rate plummeted by 28 percent in two months.