Ministry plans 25-year cap on inflation-linked mortgages

The Ministry of Finance and Economic Affairs plans to limit the term of inflation-linked consumer mortgages to 25 years, mbl.is reported. The proposal was submitted to the government’s public consultation portal on Monday, with legislation intended to take effect on January 1, 2027.

The ministry plans to introduce a bill to Parliament that would also restrict other loans with repayment schedules similar to those of longer-term inflation-linked mortgages. Exemptions from the 25-year limit could be allowed for a certain share of loans.

The ministry says these mortgages are the only widely used loans of this kind. Regular costs are added to the principal, so the outstanding balance can rise during part of the loan term. Under the proposed limit, the principal would not increase in nominal terms during any 12-month period, assuming inflation is at the Central Bank’s 2.5% target and using the average interest rate on new inflation-linked loans from banks and pension funds over the past 10 years.

The bill is also expected to set a ceiling on costs other than inflation adjustments that can regularly be added to mortgage principals. Loan terms would have to prevent the nominal balance from rising by more than a set percentage in any year because of accumulated interest or other costs.

Konráð S. Guðjónsson, an economist at Kontext, told Morgunblaðið that most people agree the role of inflation indexation should be reduced. The question, he said, is how and when to do so, rather than whether to do it.

He said the property market currently has increasing supply, high prices and homes are taking longer to sell. Interest rates are unlikely to fall soon, he added. Restricting this type of loan could add to price pressure and lead to lower prices over the longer term, but he cautioned that the market adjusts slowly and questioned the timing.