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Borrower-based measures

Under the Act on Mortgage Lending to Consumers, no. 118/2016, the Central Bank of Iceland is authorised, subject to prior approval by the Financial Stability Committee, to adopt rules restricting mortgage lending to consumers. The Act provides for the application of various macroprudential instruments, cf. Chapter VII of the Act, aimed at preserving financial stability, strengthening lenders and consumers’ resilience to imbalances in the real estate market, and mitigating systemic risk over the long term.

Borrower-based measures currently in effect

Loan-to-value ratios for mortgage loans

Rules on Maximum Loan-To-Value Ratios for Mortgage Loans to Consumers have been in effect in Iceland since July 2017. The rules provide greater scope for financing first-time home purchases by allowing a higher maximum loan-to-value ratio.

The loan-to-value ratio indicates the proportion of the market value of a residential property that is pledged as collateral for loan financing. It is defined as the total amount of mortgage loans secured by a specific property as a percentage of the market value of that property. The market value is generally determined based on the purchase price specified in the purchase agreement or accepted purchase offer.

 

Debt service-to-income ratios for mortgage loans

Rules on Maximum Debt Service-to-Income Ratios have been in effect since December 2021. The rules provide greater scope for financing first-time home purchases by allowing a higher maximum debt service-to-income ratio. In addition, the rules provide for a general exemption from the maximum debt service-to-income ratio. Lenders may use this exemption to grant consumers loans whose debt service exceeds the specified limits.

The debt service-to-income ratio for mortgage loans is a measure of household liquidity risk and indicates the proportion of a borrower’s income used for servicing mortgage loans. It is defined as the monthly debt service on mortgage loans as a percentage of monthly disposable income. Debt service refers to principal and interest payments on all the borrower’s mortgage loans, while disposable income refers to the borrower’s expected permanent income.

 

Central Bank of Iceland Special Publication no. 20/2025 provides a comprehensive discussion of the application of borrower-based measures in Iceland and places them in an international and academic context considering the experience gained in recent years. The publication is intended to make a useful contribution to the discussion of borrower-based measures, their application, and their role in economic policy.

 

The Rules on Maximum Loan-to-Value Ratios and Debt Service-to-Income Ratios for Mortgage Loans to Consumers are reviewed regularly considering systemic risk that may arise from developments in the housing and credit 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, Construction and Planning 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

Borrower-based measures are intended to prevent excessive credit growth and its impact on asset prices. They also strengthen the financial position of households and lenders and improve their ability to withstand unexpected shocks. The measures reduce the likelihood that households will experience financial distress following a shock and support lenders’ willingness to extend credit during economic downturns.

Under the Act on Mortgage Lending to Consumers, the Central Bank is authorised to impose the following restrictions on mortgage lending:

  • A maximum loan-to-value ratio
  • A maximum debt service-to-income ratio
  • A maximum debt-to-income ratio

To date, the Central Bank has set rules on maximum loan-to-value and debt service-to-income ratios.

The Central Bank is also authorised to impose restrictions on foreign currency-denominated lending by credit institutions to borrowers that are not hedged against foreign exchange risk. The Bank has not yet exercised this authority.

The borrower-based measures apply to all mortgage loans to consumers, irrespective of the lender.

The following loans are exempt from the borrower-based measures:

  • Loans granted for maintenance work on multi-unit residential buildings.
  • Loans granted for the purchase or modification of residential property to meet special needs arising from disability or illness.
  • Loans granted to refinance existing mortgage loans, provided that the refinancing does not increase the principal of the loan or loans.
  • Loans granted in connection with shared-equity loans.

The Rules on Maximum Loan-to-Value Ratios and the Rules on Maximum Debt Service-to-Income Ratios do not apply to certain mortgage loans granted for refinancing purposes because of a consumer’s payment difficulties, even if the loan principal increases. However, under the rules on loan-to-value ratios, the exemption is subject to the condition that the loan be used in full to repay an older mortgage loan, together with borrowing costs.

The Central Bank is authorised to provide for a general exemption from borrower-based measures in respect of a specified proportion of the total amount of loans granted during a given period. At present, each lender is permitted, in each quarter, to grant mortgage loans in excess of the maximum debt service-to-income ratio up to an amount corresponding to 10% of the total amount of mortgage loans granted during the preceding quarter.

According to Central Bank of Iceland Rules on Maximum Loan-to-Value Ratios (LTV) 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.