Finance Minister Daði Már Kristófersson will soon reintroduce a bill that, if passed, could make housing loans more affordable for most Icelandic borrowers.
“This is essentially the implementation of European rules related to risk assessment in loan portfolios,” Kristófersson told mbl.is.
“The Ministry of Finance believes this change will give banks more flexibility to offer lower-cost housing loans, as the risk weighting for mortgages is being adjusted — to the benefit of Icelandic consumers.”
Frostadóttir: “Could mean lower interest costs for households”
Prime Minister Kristrún Frostadóttir expressed a similar view following Tuesday’s cabinet meeting.
“We just approved the finance minister’s bill on CRR III — which, in plain terms, means the government is implementing an EU directive allowing financial institutions to better account for risk in their operations.
We expect this could translate into lower interest costs for households, because Icelandic banks generally hold relatively secure assets when it comes to their mortgage portfolios,” the prime minister said.
Risk weighting for mortgages to change
The bill introduces the CRR III regulation — the EU framework governing banks’ capital-adequacy requirements.
The regulation is complex and its effects will vary, but the ministry’s overall assessment is that it could reduce the amount of capital banks are required to hold. That, in turn, could lower their funding costs and create room to reduce interest rates on household mortgages.
The most significant changes for Iceland concern capital requirements for home loans — particularly residential mortgages.
As Kristófersson noted, the risk weighting for mortgages is being revised. According to the ministry, this adjustment is the key factor that could allow banks to lower households’ borrowing costs.
Lower capital requirements for moderate-risk loans
When calculating capital requirements, loans are assigned different risk weights that reflect how risky they are. The higher the risk weight, the more equity a financial institution must set aside to cover potential losses.
For mortgages, the risk weight depends on the loan-to-value (LTV) ratio — the size of the loan compared with the value of the property. Loans with higher LTV ratios are considered riskier and therefore receive higher risk weights.
Up to now, the standard rule has been a 35% risk weight for residential mortgages with an LTV ratio of 80% or less, and 75% for the portion exceeding that. Under the new bill, the main rule would set a 20% risk weight for mortgages with an LTV ratio of 55% or less, and 75% for the portion above that.
In effect, the overall risk weight would be lower for loans with an LTV ratio below 75.7%, and higher for those above that threshold.
Lower rates for most, higher for a few
The new structure could lead to lower interest rates for mortgages with moderate LTV ratios, but higher rates for loans with high LTV ratios.
Most new mortgages in Iceland fall below the 75.7% threshold — about three-quarters of first-time-buyer loans and roughly 90% of other residential mortgages.
This means that, for the majority of homeowners, the new risk weights could ultimately translate into lower mortgage interest rates.
Source: Mbl.is
