Country Profile

Photo Credit: Michael Nicholson/Corbis, Britannica

At the end of 2012 Iceland had a population of 320,137 people with 93 percent of the population reportedly living in urban environments and a 73 percent urban home ownership rate (WDI, 2012). Over 63 percent of the population lives in Reykjavik which saw house prices rise by over 50 percent in real terms from 2004 to 2007 during the housing boom (EMF, 2011).

The housing credit system has been dramatically impacted since the recent financial and economic crisis which caused the closure of the three largest Icelandic commercial banks in October, 2008 (EMF, 2011). Two of the government owned banks had been privatized in 2003 and beginning in 2004, the ensuing deregulation allowed the newly private banks to enter the mortgage lending market at competitive rates.  

The Housing Finance Fund (HFF) is a financially independent institution, funding itself by issuing indexed HFF bonds which are backed by a government guarantee (HFF; Central Bank of Iceland, 2013). The HFF was created in 1999 to replace the Housing Authority, with the intention to “ensure housing security and equality for all Icelanders through lending and organization of housing affairs and special investments in order to increase people´s opportunities of obtaining and leasing housing on controllable term” (HFF). While the HFF originally had a seventy percent Loan-to-Value (LTV) cap, the government announced in 2003 that there would be an increase in LTV up to ninety percent moving forward. In 2004, HFF began to offer lower interest rate price-level-adjusted mortgages linked to the Consumer Price Indexed (CPI) (Mallet, 2013; EMF, 2011).  Concurrently in 2004, newly privatized commercial banks also began to offer these same CPI linked mortgages. The competition drove real interest rates down to 4.15 percent and one bank even offered 100 percent LTV.  When real interest rates began to rise in 2006, the banks began offering FX-linked mortgages tied to international currencies (EMF, 2011).

During the housing boom, household debt rose dramatically as house prices rose and borrowers were allowed to contribute less equity than ever before (Central Bank of Iceland, 2013). When the krona began to depreciate in 2008 the mortgage amounts began to rise on FX-linked mortgages. Inflation rose to 18 percent in 2008 leaving households who had CPI-linked mortgages with unbearable debt as house values began to fall. Household debt was at its highest in 2009 at 134 percent of the GDP (OECD, 2013). In 2009, 27 percent of households were in financial distress. Mortgage debt to residential borrowers in Iceland is provided with full recourse (EMF, 2011).

When the three major private banks stopped operating in 2008 the Financial Supervisory Authority created three new state run banks to take over the domestic activities of the old banks, and mortgages were rolled over at a discounted rate (Central Bank of Iceland, 2013). In an attempt to decrease foreclosures the government and banks froze many mortgages and an office of the Debtor’s Ombudsman was created to work with borrowers to find the best alternative for writing down and restructuring their debt. Bankruptcy laws were changed to expedite the bankruptcy process down to two years rather than upwards of twenty years as was the norm under the full recourse system (EMF, 2011). After the collapse of the banks in 2008, the HFF was the only mortgage lender still creating new loans until commercial banks reentered the market in 2011 offering non-indexed loans (Icelandic Financial System, 2013; EMF, 2013).

In 2010, the Supreme Court of Iceland ruled that the FX-linked mortgages were illegal since they had been paid in ISK but indexed to foreign currencies. These loans were written down to the original principal amount over which interest would accrue. In 2011, the governments and the HFF agreed to write down mortgage debt over an LTV of one hundred and ten percent for CPI-linked mortgages. It is estimated that ISK 200 billion in mortgage debt was written down in 2011 on both FX and CPI-linked mortgages (EMF, 2013). By Q4/2012 household debt had declined to one hundred and ten percent of GDP and house prices had increased by 7.6 percent over the previous year.

In November 2013, the Icelandic government announced that the principal of indexed housing loans would be written down by splitting up the original loan into two separate loans, a Primary Loan and a Relief Loan. The Relief Loan will decrease by a quarter each year until it has disappeared by the end of year four.  Tax breaks will be offered to borrowers who apply pension saving to paying down their mortgage debt (Prime Minister’s Office, Government of Iceland, 2013). While the market is getting stronger and debt restructuring efforts have helped, there are still many middle class families underwater due to their indexed mortgage loans (Central Bank of Iceland, 2013).


1) The World Bank. World Development Indicators Database. Web. 10 Feb. 2014.

2)  European Mortgage Federation. "HYPOSTAT 2011: A Review of Europe’s Mortgage and Housing Markets." 2011, p. 21-24.

3)  European Mortgage Federation. "HYPOSTAT 2013: A Review of Europe’s Mortgage and Housing Markets." 2013, p. 75-76.

4) Mallet, Jacky. “An Examination of the effect on the Icelandic Banking System of Verðtryggð Lán (Indexed-Linked Loans)”2013, p. 2.

5) OECD. OECD Economic Surveys: Iceland 2013. OECD Publishing. 

6) Icelandic Financial Services Association. “Mortgage Financing”. Web. 12 Feb. 2014.  

7)  Ólafsson and Vignisdóttir. “Households’ position in the financial crisis in Iceland”. Central Bank of Iceland.