Steep interest rate hikes from Iceland’s Central Bank mean that many Icelandic families face much higher mortgage payments than they did one year ago. Doctor of Economics Ólafur Margeirsson, however, does not recommend those with non-indexed loans to refinance to indexed loans. Ólafur says ensuring more housing supply will be key in regulating the housing market.
The debt load of non-indexed loans in Iceland has risen by over ISK 100,000 [$709; €708] per month, in the case of an ISK 50 million loan with a variable interest rate of 3.4% taken in early 2021. “There are quite a few families who can’t afford an additional ISK 100,000 a month,” Ólafur told RÚV, saying there were two ways out of the housing market’s difficulties. “Firstly, we must encourage more supply of that which is lacking. And there is a lack of real estate in Iceland. There is a housing shortage so we must build more and continue building more. The other thing is limiting access to indexed loans in order for interest rate hikes to work.”
Central Bank will continue to raise rates to tackle inflation
Inflation has risen to 9.9% in Iceland, and the Central Bank Governor has stated that the bank will continue raising interest rates as much as necessary to tackle inflation. Ólafur did not recommend borrowers with non-indexed loans refinance over to indexed loans. “Remember that the principal on indexed loans increases. Try to pay off debts as quickly as you can, because then the impact will be less when the interest rate changes in the future.”
Ólafur added that housing would be a big issue in the coming wage negotiations this fall, suggesting that one solution is for “Icelandic pension funds, like pension funds in Europe, to invest in building new apartments in order to rent them out. With that, we are systematically increasing the supply of real estate, we are reducing pressure on rental prices, reducing the pressure on real estate prices, and with that, we are reducing inflationary pressure and interest rate pressure as well. This is a key point that must be discussed in wage negotiations.”