A majority of those who take a mortgage in Iceland choose a price indexed loan over a non-indexed loan. Ms. Regina Bjarnadottir, director of the research division at Arion Bank, says that the increased interest rate difference between price indexed and non-indexed loans contributes to this.
Monthly payments for a price indexed mortgage are also lower, which is likely a large part of the reason why many choose price indexed loans. Every month you only pay out the real interest rate of the loan, the rest is added to the principal of the loan. Since inflation is usually high in Iceland, it is common that the principal increases in nominal terms for many years. Monthly payments for price indexed loans are in fact too low. Price indexation has been used for over 30 years in Iceland, mostly because of high inflation. Iceland has its own currency, and this tiny currency contributes to high inflation and high real interest rates. The Icelandic króna is in effect an economical oscillator. And now the country is locked behind strict capital controls.
The government plans to remove the price indexation. This would make it more difficult for the low income families to buy a home. This would put pressure on the rental market, but the rent in Reykjavik has been increasing fast in past years. Many say that the price indexation only exists because of high inflation, and the only way to remove the price indexation is to permanently lower inflation, and the only way to do that is to join the EU and start using euros. The prime minister has however said that Iceland is not on its way to join the EU. The government has also not put forward any plans regarding how to fix the rental market, or how to permanently lower inflation.