29 September 2021

Central Bank sets new rules capping debt service-to-income ratios on consumer mortgages

The Central Bank of Iceland’s Rules on Maximum Debt Service-to-Income Ratios on Consumer Mortgages, no. 1077/2021, approved at a meeting of the Bank’s Financial Stability Committee on 28 September 2021, were published in the Law and Ministerial Gazette (Stjórnartíðindi) today. The Rules take effect on 1 December 2021.

The purpose of the Rules is to safeguard financial stability, shore up lenders’ and borrowers’ resilience against imbalances in the housing market, and limit the build-up of long-term systemic risk.

The debt service-to-income (DSTI) ratio measures the percentage of a borrower’s disposable monthly income that is used to make monthly mortgage payments. The term debt service refers to all payments of instalments and interest on loans secured by real estate. The ratio is calculated by dividing the monthly debt service on a mortgage loan by the borrower’s disposable monthly income.

According to the new Rules, debt service on new mortgage loans may not exceed 35% of the borrower’s disposable monthly income. For first-time buyers, the maximum is set at 40%. The Rules contain formulae for calculating the DSTI ratio, including provisions authorising lenders to cap loan maturities at 40 years for non-indexed mortgages and 30 years for indexed mortgages.

It should be noted that the Rules apply to mortgage loan agreements made after the Rules take effect.

Press release no. 23/2021
29 September 2021