In Q1/2025, 30% of all buyers in the residential property market were purchasing their first home. Just over 4,000 individuals bought property during the quarter, including roughly 1,200 first-time buyers. The share of first-time buyers has held broadly steady in the recent term, albeit with some exceptions. It was 29% in Q1/2024 but plunged in Q2 to 23.5%, its lowest since 2009. Even so, while the proportion of first-time purchasers declined markedly, the absolute number did not; in fact, there were around 1,360 first-time buyers in Q2, slightly more than in the quarters immediately before and after. The drop in the ratio was due to a surge in the number of other buyers in spring 2024, when Grindavík residents sold their homes to the Government and bought property elsewhere. This simulated the market, as we have discussed in the past.
How are things with first-time homebuyers?
First-time buyers have had to tolerate stringent lending requirements, as have other homebuyers. The requirements in question, often called borrower-based measures, appear to have delivered the intended result without locking first-time purchasers out of the market. Many of these newcomers have been able to buy their first home, some of them with the assistance of Housing and Construction Authority (HMS) equity loans.
As can be seen in the chart above, the number of first-time homebuyers rose considerably from H2/2020 until well into 2021. In Q1/2021, 33.2% of buyers were acquiring their first home, the largest first-time buyer share on record, although it has come close a few other times. Over this period, the number of homebuyers rose in all buyer groups, demand for housing was strong, and market activity was strong, pushing prices sharply upwards.
Four years of tight borrower-based measures
When the housing market started heating up in the midst of the pandemic, the Central Bank’s (CBI) Financial Stability Committee (FSN) decided to hit the brakes. The Committee used its powers to tighten borrower requirements on mortgage loans with the aim of limiting borrowers’ exposure to risks stemming from market imbalances, thereby mitigating systemic risk in the long run. The FSN’s first step was to lower the maximum loan-to-value (LTV) ratio from 85% to 80%, by means of rules set in July 2021. For first-time buyers, however, the maximum LTV ratio was held unchanged at 90% for a while. Over this period, house prices continued to skyrocket, and in December 2021 the FSN set new rules capping borrowers’ debt service-to-income (DSTI) ratios. The rules set the maximum DSTI ratio for new mortgages at 35% of the borrower’s disposable monthly income, and 40% for first-time purchasers. Then, in June 2022, the FSN set rules lowering first-time buyers’ maximum LTV ratio from 90% to 85% of the market value of the underlying property. It is now four years since the CBI first adopted the tightened borrower-based measures, which remain in effect. But have they proven their value, and is there cause to relax them now that the housing market has settled down?
LTV ratios on new mortgages have fallen despite higher house prices
According to CBI data, LTV ratios on new mortgages have fallen somewhat since 2021, especially for first-time buyers. This sub-group’s average LTV ratio was 78% in 2021 and dropped to 75% in 2022. It had therefore fallen slightly before the tighter rules on maximum LTV ratios for first-time buyers took effect in mid-2022. This is probably because the rules on maximum DSTI ratios were already in place, and by that time house prices were already quite high relative to fundamentals such as wages. The situation probably complicated matters for prospective newcomers and kept some of them out of the market altogether. The average LTV ratio for first-time buyers dropped still further when the CBI tightened its rules. Thus far in 2025 it has averaged 71%.
The average for all new mortgages declined at the same time, from 59% in 2020-2022 to the current 56%. The CBI’s rules have probably been a factor in the downturn over the past few years, but house prices as measured by the house price index have risen more than 70% over the same period. Although the LTV average for all buyers combined is considerably below the maximum, it can be assumed that the cap imposed by the CBI has pushed the average downwards. The rules have probably played a part in preventing overleveraging, particularly among new buyers in a turbulent market.
Debt service burdens have increased
LTV ratios on new mortgages may have fallen, but DSTI ratios have risen, as the chart below illustrates. At first, only first-time buyers’ DSTI ratios rose to any substantial degree. On average, it rose from 26% in 2020 to just over 29% in 2022. Over the same period, the DSTI ratio for all buyers combined rose quite a bit less, from 19% to 20%, on average.
As is noted above, the rules capping DSTI ratios were set in December 2021. Presumably, the FSN was particularly concerned about first-time buyers and their increased debt service burden when it set the DSTI rules. In spite of higher interest rates, first-time buyers’ debt service burden has increased only a little since 2022. Their DSTI ratio has averaged around 30% in 2025 to date. For all buyers combined, debt service burdens have increased slightly more over the same period, or from 20% to 22%, which nevertheless is well below the threshold specified in the CBI’s DSTI rules. Apparently, other buyers have had more scope to absorb higher debt service than first-time buyers have, and have therefore shifted less strongly to loan forms such as annuities, which minimise debt service.
According to these data, the CBI’s rules have both prevented overleveraging amidst the past few years’ spiking prices and dampened demand for housing. Interest rate hikes have also played a role in slowing demand. It is interesting that debt service on new mortgages did not rise more over this period, given that the policy rate mushroomed from 0.75% in mid-2021 to its peak of 9.25% by mid-2023. Interest rates have receded since then, to the current 7.5%.
Indexed loans the most popular form
Increased demand for indexed loans is probably the key reason DSTI ratios have not risen more sharply in the high-interest environment of the past few years. Indexed loans have far lower debt service than non-indexed loans do at the beginning of the loan period, but equity is accumulated more slowly. During the pandemic, when interest rates were low, a majority of new mortgages were non-indexed variable-rate loans. When interest rates started to rise again over the course of 2021, more borrowers resorted to fixed-rate clauses. Demand for indexed loans returned to their peak after mid-2023, when the policy rate topped out at 9.25%. The CBI began lowering the policy rate gradually in Q1/2024, and demand for non-indexed mortgages with fixed interest rates has been picking up again. Thus far in 2025, some 59% of new mortgages are indexed and the other 41% non-indexed.
2020. Demand for equity loans has been stronger than originally anticipated, forcing the HMS to limit loan allocations. The initial impact of this measure is unclear: HMS equity loans are granted solely for the purchase of new properties that satisfy specific requirements, but stimulating demand in a demand-driven market generally pushes prices higher. By now, the supply of new builds has increased substantially, and the average time-to-sale for such properties is long. As a result, HMS equity loans probably have a relatively limited effect on house prices.
Is it time to ease borrower requirements?
House prices have skyrocketed in recent years, but the outlook is for a better balanced market in the coming term. Supply has grown and demand has subsided. The CBI’s tight borrower-based measures are one of the factors keeping demand in check. They have not caused the market to seize up, and many individuals appear ready to buy a home. This includes first-time buyers, who account for a broadly unchanged share of the full buyer cohort. Thus far, housing market activity has been stronger this year than in 2023, but much weaker than in 2024, owing to the Grindavík effect.
The FSN has not indicated when it will scale down the borrower-based measures, or whether it will do so in the near future. In a recent interview, the Governor, who also chairs the FSN, said it might be possible to ease borrower requirements for first-time buyers soon. It is clear that demand would pick up if the Committee were to relax the requirements. That being the case, the CBI will have to assure itself that the housing market can tolerate an uptick in demand and that changes to borrower-based measures will not prompt a spate of overleveraging.
