A sharp interest rate hike by the central bank of Iceland means that many Icelandic families are facing much higher mortgage payments than they were a year ago. However, Ólafur Margeirsson, Ph.D. in economics, does not advise anyone with a non-indexed loan to refinance to an indexed loan. Ólafur says securing more housing supply is key in regulating the housing market.
Iceland’s unlinked loan debt burden increased by more than ISK 100,000 [$709; €708] Let’s say you take out a loan of ISK 50 million at a floating rate of 3.4% in early 2021. There were two ways he could get out of the housing market troubles. “First, we need to accelerate the supply of what is in short supply. And then there is a shortage of real estate in Iceland. The other is to restrict access to indexed loans so that rate hikes can work.”
Central Bank Continues to Raise Rates to Fight Inflation
Inflation in Iceland has climbed to 9.9% and the central bank governor has said the bank will continue to raise interest rates as needed to combat inflation. Ólafur did not recommend non-index loan borrowers to refinance to index loans. “Remember that your indexed loan will increase your principal. Try to pay off your debt as soon as possible as it will be less impacted when interest rates change in the future.”
Ólafur added that housing will be a big issue in the wage negotiations due this fall, and one solution is that “Icelandic pension funds, like European pension funds, will sell new apartments for rent. By investing in the construction of , we are systematically increasing the supply of real estate, reducing pressure on rental prices, reducing pressure on property prices, thereby also reducing inflationary pressures and interest rate pressures. This is an important point that must be discussed in wage negotiations.”
Rising mortgage payments in Iceland were first published in Iceland Review.