Restrictions on mortgage lending

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 macroprudential tools intended to preserve financial stability, safeguard lenders’ and consumers’ resilience against imbalances in the financial market, and reduce systemic risk in the long term.

Consumer mortgage lending restrictions 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. It is appropriate to note that according to Article 25, Paragraph 2 of the same Act, it is authorised to grant flexibility in the Rules for the financing of consumers’ first home purchases. The Rules account for this and permit higher loan-to-value ratios for first-time buyers. 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.

The Rules on Maximum Loan-to-Value Ratios 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
Maximum LTV ratio 80% of the market value of the underlying property* 85% of the market value of the underlying property*
Maximum DSTI ratio 35% of disposable income 40% of disposable income

* 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 a minimum interest rate of 5.5% and a maximum loan term of 40 years, while debt service on indexed mortgages shall be calculated based on a minimum interest rate of 3% and a maximum loan term of 25 years.

 

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  • 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. 778/2021, 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. 778/2021 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.

Rules on maximum loan-to-value ratios for residential mortgages revised by Central Bank of Iceland on 30 June 2021

Statement of the Financial Stability Committee 30 June 2021

 

Rules on maximum loan-to-value ratios issued by the Financial Supervisory Authority on 18 July 2017

Memorandum on the decision to issue Rules on maximum loan-to-value ratios for residential mortgages

Financial Stability Council opinion on rules concerning maximum loan-to-value ratios