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What can affect your non-indexed mortgage?

Interest rates can rise at any time and being prepared makes all the difference.

Buying your first apartment is not easy and the price of property can seem out of reach. However, first buyers now have access to lower interest rates which should make all the difference.

You will need to complete a credit check if you want to take a mortgage. The credit check gives you an idea of how much you can pay per month and which mortgage would be the best fit. Buying your first property often means borrowing as much money as you can. This could make it difficult to find your monthly payments if you experience wage losses or if interest rates rise.

Interest rates are currently stable and are expected to stay low in the coming months. However, they could rise at some point. There are two things that you should consider:

·       What could make interest rates rise?

·       What effect would this have on your finances?

Let’s start by taking a look at the first point. 

When do interest rates increase or decrease?

The Central Bank of Iceland has the most influence on mortgage interest rates, although other factors also affect them. To simplify matters let's just say that the Central Bank´s interest rates are similar to the accelerator in your car. When the economy is stable, you accelerate by lowering interest rates. This encourages businesses and individuals to invest or borrow and strengthen the economy. The Central Bank has been accelerating recently and that’s why lower interest rates have been available.

However, when the Central Bank starts to worry about the state of the economy or inflation, then it takes its foot off the accelerator. Slowing down should discourage borrowing and investment so that stability can be reached once again.  The banks mostly stay in line with these interest rates which can affect your mortgage. Mortgages with a variable interest rate can change rapidly. You can ask your bank when fixed-rate mortgages will be reviewed.

Are Interest rates going to rise again?

The Central Bank believes that lower interest rates should be maintained at present. However, we are used to seeing higher interest rates in Iceland and this could occur at any time. Interest rates are not likely to change soon, but conditions might change.

Many factors affect the Central Bank’s decision on interest rates, but inflation is the most important factor. Inflation measures the increase/decrease in the level of prices of goods and services, which can be anything from the price of apples to the price of flights, hotel nights, rent or gym membership. The ISK is has weakened recently, import costs have risen since last year and inflation is still at a point where the Central Bank does not see any need to raise interest rates. The aim is to keep interest rates close to 2.5%.

The inflation rate is not the most interesting subject in the world and most of us give it little thought. However, it does affect your income and it might be a good idea to keep up with any changes. You can register with Íslandsbanki Analysis which offers an in-depth analysis of economic and financial issues witch includes an monthly inflation forecast and actual inflation numbers.

 What happens if interest rates rise?

You should be aware that interest rates can rise at any time and we advise you to assess the effects that this might have on your monthly payments. Higher monthly payments might make it difficult for you to accommodate higher interest rates, but you could perhaps refinance. Refinancing means paying off the old mortgage and replacing it with a new one. The new mortgage could be indexed which would mean paying less each month for the time being and paying more later. You can ask for a fixed rate of between 3 to 5 years for indexed mortgages by altering the Terms of Agreement. You should always start by contacting one of our experts before you make any decisions.

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Tryggvi Snær Guðmundsson

Economic analyst

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