Central Bank of Iceland | Borrower-based measures

The Act on Mortgage Lending to Consumers, no. 118/2016, authorises the Central Bank of Iceland, subject to prior approval by the Financial Stability Committee, to adopt rules restricting mortgage lending to consumers. The Act authorises the use of three different borrower-based measures intended to preserve financial stability, safeguard the resilience of lenders and consumers against imbalances in the financial market, and reduce systemic risk in the long term.

Borrower-based measures currently in effect

Below is a summary of rules that have been adopted to restrict maximum loan-to-value (LTV) ratios for new mortgage loans in accordance with Article 25, Paragraph 1 of the Act on Mortgage Lending to Consumers, no. 118/2016. According to Article 25, Paragraph 2 of the same Act, the Central Bank shall grant flexibility for the financing of consumers’ first home purchases.

Rules capping borrowers’ debt service-to-income (DSTI) ratios on new mortgage loans have also been adopted, in accordance with Article 27, Paragraph 1 of the same Act. Furthermore, the Rules grant increased scope for financing a first-time purchase, as is provided for in Paragraph 2 of the same Article. In addition, there is a general exemption that lenders may, if they so choose, use to grant consumers loans with a higher debt service burden than the rules allow. The exemption is defined as 10% of the total amount of mortgage loans granted by each lender in the previous quarter.

The Rules on Maximum Loan-to-Value Ratios and Maximum Debt Service-to-Income for mortgage loans to consumers will be reviewed on a regular basis, with reference to developments in the housing and mortgage lending markets.

Restrictions	General	First-time buyers	General exemption
Maximum LTV ratio	80% of the market value of the underlying property*	90% of the market value of the underlying property*
Maximum DSTI ratio	35% of disposable income**	40% of disposable income**	10% each quarter of the total amount of granted mortgage loans

* Property value according to purchase agreement or accepted purchase offer. If there is no purchase agreement or accepted purchase offer, the ratio shall be based on the official property value or fire insurance value as listed by the Housing and Construction Authority, or the appraised value as determined by a certified real estate agent, in accordance with the lender’s lending rules.

** Disposable monthly income is defined in the law as a borrower’s expected sustained income, net of direct taxes and expenses. Debt service on non-indexed mortgage loans shall be calculated based on the contractual interest rate or a minimum interest rate of 5.5%, whichever is higher, and a maximum loan term of 40 years, while debt service on indexed mortgages shall be calculated based on the contractual interest rate or a minimum interest rate of 3%, whichever is higher, and a maximum loan term of 25 years.

Q&A

The Central Bank’s position on LTV ratios and amendments to terms and conditions in cases of financial distress

According to Central Bank of Iceland Rules on Maximum Loan-to-Value Ratios for Mortgage Loans to Consumers, no. 1131/2025, the maximum LTV ratio is generally set at 80%. The Rules are adopted on the basis of Chapter VII of the Act on Consumer Mortgages, no. 118/2016.

According to Article 23, Paragraph 1, Item 3 of Act no. 118/2016, it is not required to conduct a credit assessment according to Article 20 of the Act in cases involving debt restructuring; i.e., postponement of payments or modifications to payment methods, when the restructuring is carried out due to financial distress on the part of the consumer. This gives lenders the opportunity to assist financially distressed consumers by lengthening loan periods, temporarily postponing payments, and adding payments in arrears to loan principal.

The Central Bank’s position is that Rules no. 1131/2025 shall not prevent lenders from approving debt restructuring for distressed borrowers, as is stated above, even if such restructuring causes loan principal to increase and the borrower’s LTV ratio to rise above the maximum provided for in the Rules.