As the payment burden of non-indexed loans continues to rise, households are increasingly moving towards indexed loans. Despite rising interest rates, the banks have not seen an increase in defaults, Mbl.is reports.
Inflation expected to remain high
The deteriorating economic outlook in recent months has led to major upheavals in the mortgage market, Mbl.is reports. Although inflation remains high, and although it is likely that inflation will continue to remain high for some time, borrowers are increasingly seeking shelter from the ever-increasing payment burden of non-indexed loans by moving to indexed loans – this despite the fact that real interest rates on non-indexed loans have been negative for some time.
According to statistics from Iceland’s Central Bank, households took out new mortgages in February worth a total of ISK 3.9 billion [$29 million/€26 million]. Of these, new indexed loans amounted to ISK 6 billion [$44 million/€40 million] while the repayment of non-indexed loans amounted to ISK 2.1 billion [$15 million/€14 million], meaning that many borrowers refinanced their loans in order to transition to indexed mortgages. As noted by Mbl.is, households have taken out indexed mortgages for around ISK 21 billion [$154 million/€140 million] since last December and paid off the non-indexed ones by around ISK 3 billion [$22 million/€21 million].
Indexed loans the most popular mortgage since last fall
As noted in a recent In Focus piece on Iceland Review, to mitigate the fallout from the COVID-19 pandemic, Iceland’s Central Bank slashed interest rates to historic lows in 2020. These cuts resulted in a real-estate boom, with many seeking to take advantage of low rates to secure roomier homes or to refinance.
Read More: In Focus: Indexed Mortgages
The majority of new mortgages signed during the pandemic were non-indexed loans with variable interest rates because such loans carry higher initial payments but allow lenders to own their homes sooner; so long as inflation remained low, monthly payments would remain feasible, and lenders would own their homes sooner.
When the key interest rate began to sharply rise last year, however, lenders were faced with an increased payment burden and began to turn increasingly to indexed loans; the variable base interest rates of the banks’ non-indexed mortgages are now in the range of 8%-9.34% compared to 3.3%-4.44% in December 2020.
This large increase in interest rates has not, however, led to increased defaults among the banks’ customers, Mbl.is notes, although the banks recognise that lenders are increasingly switching to indexed mortgages. About half of all non-indexed mortgages have a fixed interest rate; most of them will not be released until the years 2024 and 2025.