Due to rising property prices and rising household indebtedness, the Financial Stability Committee of the Central Bank of Iceland decided to set rules for the maximum debt service burden so that the mortgage debt ratio is generally limited to 35 percent and 40 percent for first time buyers.
The debt burden ratio is calculated as the ratio of the mortgage debt burden to the monthly disposable income of a natural person. The mortgage debt service burden is the sum of the debt service burden of all mortgage loans, and the monthly disposable income is calculated as the borrower’s expected permanent income per month after taxes and other charges.
“When calculating the ratio, a certain maximum of the mortgage term is assumed. “Lenders receive a regulatory waiver of up to five percent of the total amount of new mortgage loans issued each quarter.” – said the committee in a statement.
It also states that the uncertainty about the condition of financial firms has decreased and the quality of loans has improved. The Committee believes that rapidly rising asset prices with rising household debt have already brought volatile systemic risks to at least the same level as before the epidemic spread.
Hence, in light of the increased accumulation of systemic risk related to volatility, it was decided to increase the increment of the volatility adjustment for financial firms from zero percentage points to two per cent.
The purpose of increasing the volatility adjustment is to reduce the likelihood that financial firms will delay lending too much in the more difficult years. By keeping volatility growth at zero, banks are better prepared to respond to potential credit losses.
“The coefficient of variation has proven its worth during the epidemic and the commission investigated what should be a neutral value for volatility in the future” – we read in the statement.
The Committee also urges payment service providers to consider the security of their systems and ensure business continuity in the light of cyber attacks and disruptions. “In the opinion of the committee, parallel payment cards must be available independently of the national small payment solution without connection to an international card infrastructure. This will be accompanied by an increase in safety and operational efficiency. The Central Bank is preparing to implement such a payment solution “ – the committee informed in a statement.
Source: Yle