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Risk Up with Five Percent Down (Payment)

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Risk Up with Five Percent Down (Payment)

Construction.

Photo: Geir Ólafsson.

Governor of the Central Bank of Iceland Már Guðmundsson does not like the idea, introduced earlier this week by a construction company, to offer 95 percent loans to home buyers, RÚV reports. Már stated that people must be able to withstand the large fluctuations in real estate prices in the country.

He noted that the large increase in housing prices can be explained by large wage increases, an improved financial position of households, and the rapid increase in tourism. He said it’s not yet clear whether a bubble in the housing market is taking shape, but admitted that it could be starting to form, and if that is the case, that would not be a reason for lowering interest rates, he stated.

It was announced today that the Central Bank of Iceland’s Monetary Policy Committee has decided to keep the bank’s interest rates unchanged at 5 percent.

“Of course we don’t like the idea of 95 percent loans. Experience has shown that housing prices in our country experience large fluctuations, and people must be able to withstand them,” Már remarked.

He pointed out that the 15 percent loans to be offered by the construction company on top of the regular 80 percent mortgage have considerably higher interest rates than could be obtained with a higher down payment.

Last night, Henný Hinz, economist for the Icelandic Confederation of Labor (ASÍ), told RÚV that 95 percent mortgages carry considerable risk.

Not much would have to go wrong for the holder of such a large loan to end up in trouble. She noted that taking a loan for such a large part of the price of the home would entail a certain level of risk. “The first thing that comes to mind is that we’re getting close to the game we were paying before the banking collapse, when 90 percent loans were not uncommon,” Henný warned.

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