Interest rate hike to impact Icelandic mortgages

Iceland's central bank, the Monetary Policy Committee, has increased its main interest rate by 0.25 percentage points, bringing it to 8%. This move is expected to raise the annual payment burden for households with non-indexed mortgages by tens to hundreds of thousands of krónur.

The precise effect on mortgage payments varies based on factors like the loan amount, the remaining term, and whether the interest rate is fixed or variable. For instance, a 20-year, non-indexed mortgage could see monthly payments increase by approximately 4,000 krónur for a 20 million króna loan, up to 16,000 krónur for an 80 million króna loan. Annually, this translates to an extra 48,000 to 192,000 krónur.

However, the increase in the central bank's policy rate does not automatically mean all mortgage rates will rise by the exact same margin. The impact on indexed loans differs significantly. While interest rate hikes don't directly increase the principal of indexed loans, they can raise the cost of borrowing and the payment burden if the loan's interest rates go up. The primary driver for the principal increase in indexed loans is inflation.

Inflation in Iceland currently stands at 5.3% over the past twelve months, with the consumer price index rising by 0.36% between June and July. To illustrate the scale of inflation's effect, a 5.3% inflation rate on a 20 million króna loan principal would amount to 1.06 million króna. For an 80 million króna loan, this figure rises to 4.24 million króna. It is important to note that these figures are solely for demonstrating the magnitude of inflation's impact and do not predict the exact increase in indexed loan principals over the next year. The actual development depends on various factors including future inflation, principal repayments, and the specific terms of the loan.