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Rising Mortgages May Put Some Families in Tight Spot

Those who recently signed non-indexed mortgages with variable interest rates may find themselves in a difficult position, according to the Director of the Institute of Economic Studies at the University of Iceland. Monthly payments could increase by tens of thousands of króna as interest rates rise.

The Central Bank responds to COVID

As reported by RÚV, the Central Bank slashed interest rates to historic lows last year to mitigate the fallout from the COVID-19 pandemic. The cuts resulted in a real-estate boom, with many seeking to take advantage of low rates to secure roomier homes or to refinance. The majority of new mortgages signed during the pandemic have been non-indexed with variable interest rates. Although the payments are initially higher, such loans allow lenders to “own their homes sooner.”

But as the economy has recovered, the Central Bank has raised interest rates by 0.25% leading commercial banks to do the same. As economists expect inflation to continue to hover well above target rates – despite a strengthening króna – real-estate prices are expected to rise, along with wages, while unemployment is expected to decrease as the price of raw commodities remains high.

The best of times, the worst of times

Such trends put pressure on the Central Bank to continue to raise interest rates, which will in turn pressure commercial banks to do the same. This will directly impact the public, especially those who signed non-indexed mortgages with variable interest rates.

This could put them in a difficult position,” Sigurður Jóhannesson, Director of the Institute of Economic Studies at the University of Iceland, stated in an interview with RÚV. “Such caveats had been raised before, that is, that these types of mortgages looked good on paper because of the circumstances last winter, but that those circumstances wouldn’t persist forever. Nonetheless, those who were unprepared, who expected interest rates and inflation to remain low, may be put into a difficult spot.”

An increase of ISK 25,000 per month

As noted in a recent report from Landsbankinn, a 1% increase in variable interest rates for a non-indexed mortgage of ISK 30 million could result in an ISK 25,000 rise in monthly payments.

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