Uncertainty has developed in the mortgage lending market following the decision handed down by the Supreme Court on 14 October 2025 in Case no. 55/2024. Lenders are now assessing the impact of this decision and are awaiting judgments in comparable cases. They have already suspended issuance of certain types of mortgage loans due to uncertainty about loan terms and conditions. As a result, the supply of credit has been reduced, at least temporarily, particularly the supply of loans with a relatively lighter debt service burden. The loan options that have been introduced to replace the suspended ones feature poorer interest rate terms and tighter borrowing requirements. The position of first-time buyers and lower-income buyers appears to have worsened especially.
In view of this and to support mortgage lending market functioning, the Central Bank of Iceland’s Financial Stability Committee (FSN) has decided to amend its borrower-based measures. The Bank’s Rules on Maximum Debt Service-to-Income Ratios for Mortgage Loans to Consumers provide for a special exemption allowing lenders to issue loans in excess of the maximum percentage. The FSN has decided to increase lenders’ exemption from 5% to 10% of the total amount of residential mortgages issued in each quarter. Furthermore, lenders shall calculate the percentage based on the quarter immediately preceding. This change is intended to give lenders greater scope to grant loans during the current period of uncertainty and to meet borrowers’ needs appropriately.
The Committee has also decided to amend the Bank’s Rules on Maximum Loan-to-Value Ratios for Mortgage Loans to Consumers by increasing the maximum loan-to-value (LTV) ratio for first-time buyers from 85% to 90%. This is done because of the aforementioned uncertainty and in view of the fact that the real estate market has undergone an adjustment since June 2022, when the Rules were tightened. The maximum LTV ratio for other borrowers will remain unchanged at 80%.
The FSN is of the opinion that these changes will give lenders greater flexibility in responding to the current uncertainty, particularly in the case of first-time and lower-income buyers. Credit institutions are encouraged to use this additional scope to ensure appropriate flows of credit while the uncertainty persists. The changes should strengthen financial stability and simultaneously reduce bottlenecks in the mortgage lending market.
As before, the Committee will apply the policy instruments at its disposal so as to preserve financial stability, thereby enabling the financial system to mediate credit and payments and redistribute risks appropriately.
No. 15/2025
31 October 2025