Published on and written by Cyril Jarnias
Purchasing a home in ICELAND is not just about choosing a view of a fjord or a neighborhood in Reykjavík. The main challenge, for residents and foreigners alike, is securing financing in a tight, highly regulated market where interest rates remain high compared to the rest of Europe. Banks, pension funds, and the Housing and Construction Authority (HMS) offer a range of tools – conventional loans, indexed loans, equity loans, tax-free retirement savings – but each scheme has its own conditions, limits, and long-term effects.
Icelandic real estate financing includes various loan types and specific borrowing conditions. Special programs exist for first-time buyers. Pension funds play a key role in the system. Foreigners must comply with particular rules. It is important to anticipate additional costs and build a realistic financing plan.
Understanding the Main Types of Real Estate Financing in ICELAND
The Icelandic system rests on three main pillars: commercial banks, pension funds, and the Housing and Construction Authority (HMS). Each operates with a different logic.
Banks like Landsbankinn, Íslandsbanki, or Arion Bank remain the dominant players in the mortgage market. They lend in ISK, offer inflation-indexed loans, non-indexed loans, or a mix of both, with terms of up to 40 years and amounts that can cover up to 80–90% of the price for some first-time buyers.
Pension funds, such as Brú, LSR, or Festa, complement this offering with loans typically capped in amount and loan-to-value ratio, but often with slightly lower interest rates than banks. Access is reserved for their members (or former members under certain conditions) and the rules are strict regarding repayment capacity.
The HMS equity loan for first-time buyers can cover up to 20% of the home price, with no interest or monthly payments.
Indexed vs. Non-Indexed Loans: Two Opposite Logics
The first major choice when financing a property in ICELAND is deciding between an inflation-indexed loan (linked to the consumer price index) or a non-indexed loan.
In an indexed loan, the outstanding principal is adjusted based on inflation. Initial monthly payments are typically lower than for a conventional loan, thanks to a lower nominal interest rate. However, part of the real cost of financing is added to the borrowed principal, which slows down the property’s amortization and delays the borrower’s accumulation of equity.
Conversely, a non-indexed loan is not linked to inflation: the principal only decreases over the years. Monthly payments are higher at the start and nominal interest rates are significantly higher, but the portion of principal repaid is larger and wealth accumulation is faster.
Recent figures illustrate this gap. In early 2025, major Icelandic banks displayed the following for new loans:
| Loan Type | Variable Rate (Average) | Fixed Rate (Average) |
|---|---|---|
| Non-Indexed Loan (January 2025) | ~10.28% | ~9.22% |
| “Best rates” offers March 2025 (non-indexed) | 9.50–9.75% | 8.00–8.30% |
| Indexed Loan (January 2025) | ~4.87% | ~5.10% |
| “Best rates” offers March 2025 (indexed) | 4.00–5.00% | 4.35–4.80% |
It’s understandable why, despite a context of gradually declining policy rates, a majority of new borrowers turn to indexed options: by the end of 2024, about 60% of the real estate loan portfolio in ICELAND was still indexed. This is especially true as the increase in repayments linked to rising rates proved more severe for non-indexed loans when the central bank raised its monetary policy rate to 9.25% in 2023.
Loan Terms and Repayment Structures
Maximum terms vary by loan type and institution, but the general framework is clear.
A non-indexed mortgage loan can go up to 40 years. For indexed loans, the standard term is typically between 5 and 25 years, with a possible extension to 30 years for first-time buyers at some institutions. Pension funds, like LSR, can offer indexed loans from 5 to 40 years, but in practice they adjust the term based on the loan-to-value ratio: beyond 65% of the property’s value, the maximum term is sometimes reduced (e.g., to 35 years).
Two main repayment methods coexist to offer flexibility and choice.
The amount is deposited directly into your bank account after your application is processed.
Your supplementary health insurance pays the healthcare provider directly, with no upfront costs for you.
– With a constant amortization schedule, the borrower repays the same portion of the principal each month, plus interest. The initial monthly payments are heavier but decrease over time.
– With an annuity schedule, the total monthly payment remains stable. At the beginning, the interest portion is dominant, then the principal portion gradually increases.
Most households opt for the annuity schedule, as it’s more predictable and easier to fit into a monthly budget. However, in an environment where rates may remain high for a long time, some prefer to pay down more principal at the start of the loan to reduce their exposure faster.
How Much Can You Borrow? Loan-to-Value Ratios and ISK Caps
The Icelandic market is characterized by sustained price increases: in the capital region, over 85% of homes exceed 60 million ISK, and the average purchase price there was around 87 million ISK in early 2025. For an average apartment in Reykjavík, you often need to budget 70 to 80 million ISK, while the price per square meter in the center can exceed 1 million ISK for new construction.
Banks can generally lend up to 80% of a home’s price. This financing consists of a base loan (about 50%) and a supplementary loan (ranging from 10% to 30% depending on the borrower’s profile).
For first-time buyers, the conditions are often slightly more favorable:
| Profile | Standard Bank Loan-to-Value | First-Time Buyer (Max) | Main Remarks |
|---|---|---|---|
| “Standard” Borrower | Up to 80% (50% base loan + 30% possible supplements, depending on the bank) | — | Often requires a down payment of at least 20% |
| First-Time Buyer – Major Banks | Up to 85% | 85% (70% base + 15% supp.) | Application fees sometimes waived |
| First-Time Buyer – Special Loan | Up to 90% | 90% | Via an “extra loan” up to 7 M ISK |
| Pension Fund (e.g., Brú) | 75% of price (65% base + 10% supp.) | 75% max | Total maximum amount typically 75–95 M ISK |
| Refinancing | 70% of registered value | — | Limited by official assessment or property valuation |
HMS, for its part, caps its “Home loan” at 44 million ISK and 80% of the price or market value, and only intervenes for homes valued below 73 million ISK. These caps illustrate the social targeting of these loans, dedicated to households unable to secure conventional bank financing or for specific projects (rural housing, housing adapted for disabilities, major renovations, etc.).
For an eligible first-time buyer using the HMS equity loan, a typical financing package could be composed as follows: a bank loan (or a pension fund loan) covering the majority of the financing, supplemented by the HMS equity loan which can finance up to 20% of the property price, all with a minimum personal down payment of 5%. This scheme specifically complements the main credit.
| Funding Source | Share of Home Price |
|---|---|
| Personal Equity (savings, pension) | 5% |
| HMS Equity Loan (interest-free) | 20% |
| Bank/Pension Fund Mortgage | Up to 75% |
In this case, the household has no monthly payment on the 20% financed by HMS, but must repay in one lump sum, after 10 to 25 years or upon resale, the same proportion of the property’s value (20% of the future price, whether it rises or falls).
Borrowing Capacity: The 35–40% Income Rule
Beyond loan-to-value ratio caps, the real barrier to debt comes from the Icelandic Central Bank (CBI) rules on the “debt service ratio” (DSTI), i.e., the weight of loan installments in disposable income.
For most borrowers, the total monthly mortgage payment must not exceed 35% of monthly net income. For first-time buyers, this limit is raised to 40% to facilitate access to homeownership. Banks and pension funds must apply these limits in their creditworthiness analyses.
To assess borrowing capacity, the authorities apply strict scenarios: a non-indexed loan is calculated over 40 years with a rate of at least 5.5%, and an indexed loan over 25 years with a minimum rate of 3%. These conditions, often less favorable than market rates, determine the amount that can be borrowed.
Credit analyses also take into account other debts (consumer credit, student loans, auto leasing), cost of living, family situation (alimony, etc.), and the stability of income. Some pension funds like Brú require, for example, a higher level of creditworthiness and a minimum credit score (especially for loans exceeding 50 million ISK).
Specific Schemes for First-Time Buyers
Icelandic authorities and several banks have multiplied levers to limit the exclusion of young households from a market where prices have increased by over 70% in a few years. Several measures are aimed directly at first-time buyers.
The HMS Equity Loan: 20% Financing with No Monthly Payment
The equity loan managed by HMS is for people who have never owned a home or who have not held property for at least five years, and whose income remains below a ceiling. It covers up to 20% of the property price and entails neither interest nor monthly repayments.
In return:
– The buyer must contribute at least 5% of the price from their own funds.
– The home must be approved by HMS (price, location, type).
– The loan must be repaid in one lump sum after 10 years (standard term) or at the agreed maturity, which can be extended in increments of 5 years up to 25 years, or upon resale.
– The amount to be repaid follows the price evolution: if the property appreciates, the repayment amount increases proportionally.
This mechanism is similar to a public “silent partner”: the state shares both the risk and the capital gain with the household. It is designed for profiles that can handle conventional loan payments but struggle to save a 15–20% down payment.
The State, as a Public Silent Partner
Using Private Retirement Savings Tax-Free
Another Icelandic specific feature is the possibility to use supplementary retirement savings to finance purchase or repay a mortgage, tax-free for a limited period. The Icelandic First-Time Homebuyer Assistance Act, in force since 2017, thus authorizes the use of a portion of savings accumulated in voluntary pension schemes for:
– Building an initial down payment (“savings” option),
– Paying the principal of the loan regularly for several years (“principal” option),
– Or a combination of both (mixed option).
The annual cap for housing savings in Iceland is 500,000 ISK per person.
This scheme, managed by the tax authority (RSK), allows for reducing either the amount to be borrowed initially or monthly payments in the medium term, with a significant tax advantage.
Pricing Advantages and Bank Extra Loans
Some banks add their own incentives. For a first-time buyer, application fees or “borrowing charges” may be waived, including when the co-borrower is a first-time buyer even if the other is not.
One institution, for example, offers an “extra loan” of up to 7 million ISK for a first purchase, which can increase the financed share to around 90% of the property price. Again, creditworthiness and DSTI ceiling conditions apply.
Finally, the Central Bank rules set a ceiling of 40% of income for the debt service ratio for first-time buyers, versus 35% for others. But despite these advantages, there has been a gradual decline in the average financing share for first-time buyers since 2021, dropping from about 78% to 71% in 2025, a sign that the required personal down payment effort is becoming more significant.
Role of Pension Funds in Real Estate Financing
Icelandic pension funds play a central role in household financing, complementing banks. They lend sometimes significant amounts to their members but with strict rules.
The Brú fund offers mortgages that can cover up to 75% of a home’s price, structured as a base loan and an additional loan.
For large loans (above 50 million ISK), Brú requires enhanced repayment capacity and a minimum credit score of level B for all borrowers. All property owners must be co-borrowers and at least one must be a member of the fund. The maximum term can reach 40 years for loan-to-value ratios below 65%, but is reduced to 35 years above that.
The LSR pension fund finances 65% of the value (70% if sole lender) with a cap of 75M ISK. The term for indexed loans is 5 to 40 years. Since 2024, following a Supreme Court ruling, LSR only offers fixed-rate indexed loans for the entire term, which secures the real monthly payment but limits renegotiation possibilities.
These pension fund loans are highly sought after in practice, as their rates are often slightly lower than banks’ for comparable risk, even though the room for negotiation is small and the access conditions are rigorous.
Special Programs: Green Loans, Parental Leave, Financial Difficulties
Several Icelandic banks have begun evolving their product range to address social or environmental issues.
“Green” loans, for homes certified according to environmental standards, generally benefit from slightly more favorable terms: a discount of about 0.10 percentage points on the interest rate and exemption from application fees. In a country where prefabricated wood construction is developing and energy performance is a key issue, these products are gaining importance.
Some banks offer a temporary reduction in loan payments during parental leave, which can be up to about half of the initial amount over a twelve-month period. This measure, intended to compensate for a drop in income, does not suspend the calculation of interest. The interest is capitalized and added to the outstanding principal. To benefit, the borrower must provide a payment schedule from the Maternity/Paternity Leave Fund (Fæðingarorlofssjóður) or a certificate from their employer.
In case of more serious difficulties (unemployment, illness, accident), partial or total payment deferrals can be negotiated with the bank or pension fund, often with the help of an advisor. The Housing Authority (HMS) can also intervene through specific loans (e.g., to adapt a home for a disability) or, in some cases, reschedule certain social loans.
Loan Application Process and Required Documents
In ICELAND, access to financing first involves a borrowing capacity assessment, often via an online simulator (on bank websites or a comparison site like Aurbjörg), followed by a meeting with an advisor.
Most institutions allow you to start the application via their app or website, through a multi-step process. Once a property is identified and a purchase offer is signed (typically valid for 24 hours), the application is processed with the following documents:
– A valid ID (passport or driver’s license),
– A purchase offer or signed sales agreement,
– A detailed statement of savings and equity (from online banking showing account holder, date, and amount),
– Possibly, a Social Security payment plan (Tryggingastofnun) if social benefits are included in income calculations,
– A statement of any alimony payments (meðlag),
– Signed consents from co-borrowers or co-owners.
In case of separation or divorce, some lenders require the property division agreement validated by the District Commissioner. After the bank prepares the mortgage deeds and they are signed, registration at the District Commissioner’s office is a mandatory step for the loan funds to be released.
The legal responsibility for registering the mortgages with the District Commissioner lies with the borrower, although in practice the real estate agent often handles the logistics. Processing times vary: a fund like Gildi, for example, announces a standard timeframe of 2 to 3 weeks to review an application.
Additional Costs: Taxation, Fees, and Insurance
A real estate project in ICELAND is not just about the property price and loan interest. The sum of additional costs – registration fee, taxes, insurance, professional fees – can reach several percentage points of the price.
On the purchase, the buyer is responsible for:
Main costs and taxes to anticipate when acquiring a property in Iceland.
Generally around 0.8% of the property’s official value, with a flat fee of about 2,000 ISK. For a first purchase, the rate may be reduced to 0.4%.
Around 0.1% of the property value.
Up to 1% of the price, but often a flat fee around 100,000–300,000 ISK.
Possible fees for credit checks, sometimes waived for first-time buyers.
The seller, on the other hand, bears the real estate agent’s commission, typically between 1.5 and 2.5% of the price, plus potential additional costs (advertising, inspections, etc.). In total, the “roundtrip cost” (purchase + sale) is typically between 2.4 and 5.2% of the price.
Once an owner, the household must pay the municipal property tax (up to ~1.6% of the cadastral value depending on the municipality), condominium fees, heating and electricity costs (high in winter but offset by cheap geothermal energy), and insurance. Fire insurance is the only mandatory insurance, but more comprehensive home insurance is common, sometimes offered in partnership by the bank.
Taxation on resale and rental income is relatively simple: capital gains are generally taxed at 22%, but the sale of a primary residence is exempt if the property has been held for more than two years. Rental income is also subject to a 22% rate, with a significant deduction if the owner rents out at most two residential properties, effectively taxing only 50% of the gross income, i.e., an effective rate of 11%.
Financing and Foreigner Status: What You Need to Know
Foreigners can buy property in ICELAND, but ownership rights and access to financing heavily depend on residency status and nationality.
Citizens of the European Economic Area (EEA) legally domiciled in ICELAND can purchase property under the same rules as Icelanders. They must have an Icelandic identification number (kennitala), be registered with Registers Iceland, and, in practice, justify a residence permit and often local employment.
Non-EEA nationals wishing to stay in Iceland for more than three months must obtain a residence permit. To acquire real estate, special authorization from the Ministry of Justice is required if they are not domiciled in the country. This authorization, limited to a specific property not usually exceeding 3.5 hectares, is only granted for direct professional use (business, investment) or in the presence of a close connection to Iceland (marriage, family ties, long-term presence).
Regarding financing, banks most often require the borrower to have income in ISK and a local tax presence. Non-residents may be offered loans indexed to a foreign currency (USD, EUR, GBP, DKK, NOK, SEK, PLN, JPY, CHF, CAD), repaid in ISK but with principal and installments adjusted to the exchange rate. In this case, the loan-to-value ratio is generally capped at 70%, with additional constraints: regular submission of pay slips in the foreign currency, annual notification of exchange rate fluctuations, and warning if the balance or payments increase by 20% due to ISK depreciation.
Many foreign investors opt for credit obtained in their home country to finance a property purchase in Iceland, which they then pay for in cash on site. This method bypasses local creditworthiness and documentation constraints. However, they must strictly follow property purchase authorization procedures and are subject to Icelandic taxation, including property taxes, rental income taxes, and capital gains taxes.
Strategies for Building a Solid Financing Plan in ICELAND
In an environment where prices remain high, where nominal rates still exceed 8–9% for non-indexed loans, and where incomes are not rising at the same pace as property values, successfully financing real estate in ICELAND requires meticulous preparation.
The first step is to assess your real borrowing capacity, incorporating the 35–40% DSTI rule but also a safety cushion. Online calculators available on bank websites or Aurbjörg provide an initial estimate, but a meeting with an advisor allows for nuance: type of employment contract, variable income, family expenses, future projects.
It is possible to mobilize up to 500,000 ISK per year from your supplementary retirement savings over ten years tax-free for a real estate down payment.
Regarding product choice, a combination of loans can make sense. For example, a household might opt for:
To optimize the financing of a rental investment, consider a combination of several loans: a main indexed loan over 25 to 30 years at a low rate to reduce initial payments, supplemented by a non-indexed loan over 20 years to accelerate the amortization of part of the principal. If eligible, add an HMS equity loan that can cover up to 20% of the price. Finally, a competitive-rate pension fund loan could potentially be used to finance an intermediate portion.
This type of structure helps spread the risk: indexation lightens the immediate burden but increases exposure to inflation, while the non-indexed portion strengthens wealth accumulation. The choice will also depend on personal expectations about rate and price trends: in a country where rate cycles can be pronounced, certain periods will make non-indexed loans more attractive.
Finally, it is advisable not to borrow up to the maximum limit the bank is willing to lend. Recent data shows that the average new loan amount per purchase has decreased in real terms by nearly 45% compared to 2022, a sign that many buyers are falling back on smaller properties or investing more of their own equity to protect against future cost increases.
Real estate financing in ICELAND is both rich in options and extremely regulated. Banks, pension funds, and HMS offer a wide range of loans – indexed, non-indexed, hybrid, equity, green – with terms of up to 40 years and special mechanisms for first-time buyers, families, people with disabilities, or low-income households.
Access to mortgage credit is subject to strong constraints: loan-to-value ratio limits, strict debt service control, amount caps, income stability requirements, and special rules for foreigners, all accompanied by heavy formalities. In a context of steep price increases and high rates, a prudent approach is essential.
To succeed in financing real estate in ICELAND, it is essential to:
– Understand the fundamental differences between indexed and non-indexed loans,
– Master loan-to-value caps and the conditions of public programs,
– Intelligently mobilize supplementary retirement savings,
– Systematically compare offers from banks and pension funds,
– Anticipate additional costs (taxes, insurance, maintenance),
– And, for foreigners, clarify residency, permit, and cross-border financing issues from the outset.
With this structured approach, the strict rules of the Icelandic system become less of a barrier and more of a framework to secure a major investment, in a country where real estate ownership remains, in the long term, an essential pillar of household wealth.
A French entrepreneur, around 50 years old, with a well-structured financial portfolio in Europe, wanted to diversify part of his capital into Icelandic rental real estate to seek yield and exposure to the Icelandic króna. Allocated budget: 400,000 to 600,000 euros, without using credit.
After analyzing several markets (Reykjavík, Kópavogur, Hafnarfjörður), the chosen strategy was to target an apartment or townhouse in a dynamic neighborhood of the capital, combining a target gross rental yield of 7 to 8% – the higher the yield, the higher the risk – and medium-term appreciation potential, with an overall ticket (acquisition + fees + possible refurbishment) of about 500,000 euros. The assignment included: market and neighborhood selection, connection with a local network (real estate agent, lawyer, tax specialist), choice of the most suitable investment structure, and definition of a diversification plan in Iceland over time, while managing legal, tax, and rental risks.
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Cyril Jarnias is an independent expert in international wealth management with over 20 years of experience. As an expatriate himself, he is dedicated to helping individuals and business leaders build, protect, and pass on their wealth with complete peace of mind.
On his website, cyriljarnias.com, he shares his expertise on international real estate, offshore company formation, and expatriation.
Thanks to his expertise, he offers sound advice to optimize his clients' wealth management. Cyril Jarnias is also recognized for his appearances in many prestigious media outlets such as BFM Business, les Français de l’étranger, Le Figaro, Les Echos, and Mieux vivre votre argent, where he shares his knowledge and know-how in wealth management.
