Deep North Episode 6: Indexed Mortgages

indexed loan iceland

In the tug-of-war game between interest rates and inflation following the economic disruptions of COVID-19, Icelandic homeowners have been put under increasing pressure. We talk about a rather unique feature of the Icelandic financial system and its effects on Icelandic families.

Read more about indexed loans in our recent In Focus piece.

Icelanders’ Home Equity Has Doubled in Five Years

apartments downtown Reykjavík housing

Icelanders are taking out more mortgage loans and their collective home equity has doubled in the last five years, Kjarninn reports. This according to data recently published by Statistics Iceland.

After debt was deducted, Icelanders’ combined home equity was ISK 4.034 billion [$29.031 million; €24.959 million] at the end of last year, which is double what it was in 2015. All total, 78% of Icelandic households’ equity is tied up in real estate.

The value of real estate owned by Icelanders has also increased dramatically in recent years. At the end of 2010, according to real estate assessment (fasteignamat), the total value of Icelander-owned real estate was ISK 2.353 billion [$16.933 million; €14.558 million], whereas at the end of 2019, this total had increased to ISK 5.648 billion [$40.645 million; €34.944 million]. This is a total value increase of 140%. These valuations are, however, only based on assessment value, not market value.

Housing loans are also dramatically increasing. Icelanders’ combined mortgage debt was ISK 1.614 billion [$11.615 million; € 9,985 million] at the end of 2019, which is an increase of 141 billion [$1.014 billion; €872.377 million] from the previous year. Housing loans have increased by ISK 352 billion [$2.533 million; €2.178 million] since 2016, or 28%. By contrast, between 2011 and 2016, loans taken out by the nation’s homeowners had only increased ISK 56 billion [$403.004 million; € 346.476 million], or 4.6%.

The trend of increased debt and higher real estate prices has continued in spite of this year’s economic shocks. According to the Central Bank of Iceland’s recent Financial Stability Report (in English), total household debt in Iceland amounted to nearly 79% of the GDP at the end of June, a percentage increase of just over 2% in the last year. From 2016 and up until this year, the nation’s indebtedness has been in line with economic growth.

According to the report, “Growth in household debt is driven by an increase in mortgage loans, while other debt has contracted in real terms, as it has in the past few years. Notwithstanding the uncertainty afoot, household demand for mortgage loans is still robust, owing to falling financing costs and stable real wages despite the economic contraction. In July, net new lending to households totalled nearly 32 b.kr., about 80% above the twelve-month average.”

Icelandic households’ asset position has, nonetheless, improved. Home equity, which accounts for assets in excess of debt, increased considerably last year and is now twice as much as the GDP. Ten years ago, home equity was equal to the GDP.

Interest-Free Loans for First-Time, Low-Income Buyers

If passed, a new bill would see the Icelandic government provide low-income buyers interest-free loans of 20% of the purchase price of their first apartment, RÚV reports. The 20% loan would not require any repayment; rather, the state would recoup 20% of the apartment price at the time of sale.

The bill was proposed by Minister of Social Affairs and Equality Ásmundur Einar Daðason. The income threshold to qualify for the loans would be ISK 7.6 million ($56,400/€50,900) a year for individuals and ISK 10.6 million ($78,700/€69,700) a year for married or cohabitating couples. These thresholds would increase by ISK 1.6 million ($11,900/€10,500) per child or teenager residing in the home.

Per the loan terms, the buyer(s) would put up a minimum of 5% of the purchase price themselves. Up to 75% of the cost would be funded by a loan from a lending institution, and the remaining 20% would come from the government. The government loan would be for 25 years and would not accrue interest or require repayment during that period unless the buyer’s income increased beyond the aforementioned thresholds for three consecutive years during the loan period.

Helping People Get Out of the Rental Market

Ásmundur Einar explained that these loans are aimed at helping people out of the rental market and that the bill represents a significant priority for him. “We are here to help people who haven’t been able to enter the real estate market, but have been stuck [renting]. Both union leadership and the business community have called for this, which is why it has formed the backbone of the government’s housing package and living wage contract.”

The loan would also benefit those who have not owned property in at least five years, thereby aiding those who lost their homes in the wake of Iceland’s 2008 economic collapse. The loans are furthermore intended to go towards new builds, explained Rún Knútsdóttir, a lawyer at the state housing association. “[T]his way, we’re actually also helping to ensure that supply increases commensurately with demand.”

If the bill passes, the government could be expected to put ISK 4 billion ($29.7 million/€26.3 million) towards these home loans in the coming years.

The full loan conditions would be as follows:

  • Loans would only be applicable for apartments in new buildings
  • Loans would only be available to purchase apartments under a specified price limit
  • Loans would only be available to first-time buyers or those who have not owned property in the last five years
  • Loans would only be available to those who cannot make a down payment and are pre-approved
  • A lendee’s mortgage repayments could not be more than 40% of their disposable income

First-Time Home Buys at a Ten-Year High

iceland real estate

First-time apartment purchases have gone up more in Iceland since 2009 than any other kinds of purchase, RÚV reports. The percentage of first-time home buyers during the first quarter of this year was 27.7%, up dramatically from 7.5% in 2009.

These were among the findings in the monthly report published by the Housing Finance Fund (HFF).

Statistical information on first-time apartment purchases is only available as far back as the second half of 2008. Based on the data from the available time period, however, the percentage of first-time home purchases has never been so high.

The highest percentage of first-time buyers were found to be in East Iceland, where 32% of all of the home purchases so far this year were made by individuals who had never owned a home before. Next was the Suðurnes peninsula in Southwest Iceland, at 31%. South Iceland and Northeast Iceland were tied for third place at 28%. Twenty-seven percent of all home purchases were made by first-time buyers in both the Westfjords and the capital area. West Iceland came in at 23% and North Iceland at 22%.

The report authors say that these figures show that it is now easier for people to save up to buy an apartment than it has been previously. It also appears, they say, that the increase in housing prices in the last ten years has only had a limited effect on first-time buyers.