Iceland's Central Bank Raises Alarm Over Expanded Equity Loan Proposals

Central Bank Warns Against Broadening Equity Loan Eligibility

The Central Bank of Iceland (Seðlabanki Íslands) issued a warning on December 14, 2025, regarding planned amendments to the country's equity loan regulations. The Bank cautioned that proposals aimed at expanding access to these loans could inadvertently fuel higher house prices and jeopardize economic stability. In a submission to parliament's Welfare Committee, the Central Bank urged lawmakers to reconsider the bill to preserve the scheme's initial objectives and prevent undue pressure on the housing market.

Understanding Iceland's Equity Loan Scheme

Equity loans in Iceland are designed to assist specific segments of the population in purchasing homes by linking a portion of the loan to the property's value. Since 2020, the scheme has primarily targeted:

• First-time buyers
• Individuals who have not owned a home for five years
• Applicants falling below predetermined income thresholds

The focus has been particularly on younger and lower-income households. These loans are distinct in that they carry no monthly installments or interest, with repayment occurring in full 10 to 25 years later or upon the sale of the property. They can cover up to 20% of the property's price, requiring a 5% down payment from personal funds.

Despite their intended purpose, the take-up rate for these loans has been lower than initially projected. Officials had anticipated between 400 and 500 loans annually over a decade, with an expected lending volume of approximately 40 billion ISK. However, the highest annual figure recorded was around 300 loans in 2021, amounting to about 12 billion ISK. A primary reason cited for this lower-than-expected uptake is the limited availability of homes that meet the scheme's specific criteria.

Government's Proposed Changes and Central Bank's Concerns

The government's current objective is to enhance the predictability and efficiency of the equity loan system. This involves increasing income caps and loan-to-value ratios, alongside efforts to collaborate with developers to ensure the provision of suitable housing.

However, the Central Bank has expressed significant reservations. It warned that broadening eligibility could boost demand and subsequently drive up house prices. The Bank also highlighted the risk that these expanded loans might reach individuals who do not genuinely require such support, thereby diluting the scheme's original intent to aid vulnerable groups. The Central Bank's recommendation is for lawmakers to revise the proposed bill to safeguard the scheme's foundational goals and mitigate any unintended inflationary effects on the housing market.

Broader Context of Financial Stability Measures

The Central Bank of Iceland continuously monitors and adjusts its policies to maintain financial stability. In a related development on October 31, 2025, the Bank's Financial Stability Committee amended borrower-based measures. This included increasing lenders' exemption for loans exceeding maximum debt service-to-income ratios from 5% to 10% and raising the maximum loan-to-value (LTV) ratio for first-time buyers from 85% to 90%. These adjustments were made in response to uncertainty within the mortgage lending market, particularly following a Supreme Court decision on October 14, 2025, which had led to a temporary reduction in credit supply.