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. 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 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.