Restrictions on mortgage lending

If imbalances in the real estate market pose a threat to financial stability, it is permissible to impose maximum loan-to-value (LTV) ratios and impose maximum loan-to-income (LTI) or debt service-to-income (DSTI) ratios in order to reduce the likelihood of shocks or mitigate their impact. The objective of applying such macroprudential tools can be twofold: first, to curtail excessive credit growth and thereby counteract the accumulation of risk during an upward financial cycle, as lower lending rates could have an indirect downward impact on real estate prices; and second, to preserve or bolster households’ resilience to future declines in real estate prices and simultaneously lower lenders expected loan losses.

Chapter VII of 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 specifying maximum LTV ratios on mortgage loans to consumers. In the same chapter is a comparable authorisation to adopt rules capping LTI or DSTI ratios for mortgage loans to consumers.

 

Consumer mortgage lending restrictions currently in effect

Rules specifying maximum LTV ratios for new mortgage loans have been adopted in accordance with Article 25, Paragraph 1 of the Act on Mortgage Lending to Consumers, no. 118/2016. In accordance with Article 25, Paragraph 2 of Act no. 118/2016, the Rules provide for a higher LTV ratio for first-time buyers. 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 85% of the market value of the underlying property* 90% of the market value of the underlying property*
* 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 Registers Iceland, or the appraised value as determined by a certified real estate agent, in accordance with the lender’s lending rules.

 

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