Equity loan

The Housing and Construction Authority (HMS) manages the lending programme for the Equity loans and the application process will be launched on the Housing and Construction Authority (HMS) website when the Act of law enters into force on 1 November 2020. 

If the buyer does not have 5%, he can e.g. withdraw accrued private pension savings in accordance with the Act on support for first-time buyers.  An applicant has to provide 5% equity in order to be eligible for an Equity loan. 

According to the law there are 6 allocations made per year.  If demand exceeds supply, names will be drawn from the pool of applicants. 

The Housing and Construction Authority (HMS) issues conditional promises to our clients. This involves a declaration to the effect that the relevant person is being offered an Equity loan and will be able to complete the financing by the Housing and Construction Authority (HMS) or by other financial firms/pension funds. This loan commitment is valid for a period of 3 months. 

Gert er ráð fyrir að endurgreiðslan fari fram í einu lagi við sölu fasteignar eða að 10 – 25 árum liðnum.

Kaupandi getur alltaf kosið að endurfjármagna núverandi húsnæði og endurgreitt hlutdeildarlánið í heild eða að hluta þegar veðrými eykst.

Hægt er að greiða inná hlutdeildarlán og lækka þannig lánið, þó að lágmarki 5% af virði fasteignar í hvert sinn.

An Equity loan is not interest bearing and will adjust in tune with the development of the market value of the property and will maintain the same ratio that existed when the original lending was made.     

Example:  If the purchasing price of a property is ISK 40 m and the Equity loan (20%) is ISK 8 m.  If the property is later valued at ISK 50 m then the Equity loan (20%) will increase to ISK 10 m and will maintain 20% of the value of the property. 

It is assumed that repayment takes place in total upon the sale of the property, or after a period of 10 – 25 years. Upon sale it is expected that the equity will be sufficient for a down payment for the next property in addition to the repayment of the Equity loan.  

The buyer will always be able to choose to refinance the present housing and to repay the Equity loan in total or in part when mortgage room is increased. 

It is possible to make a payment towards an Equity loan and thereby lower the amount of the loan, however a minimum amount of 5% of the value of the property is required on each repayment. 

It is expected that a property that has been bought with an Equity loan is the only property held by the borrower and that he will have his legal domicile at the premises. Therefore, there will be a provision to call in the loan if the relevant person moves out of the property or rents it out. However, there is a provision for making exemptions such as if the relevant person begins studies or needs to move temporarily because of work or because of other such causes. 

The final decision has still to be worked out with respect to the definition of economical properties, but this decision will be expressed in government regulations. The plan is to look rather at family sizes and the efficiency is therefore rather defined based on the maximum price relative to number of rooms, rather than at the number of square meters and thereby widen the options that the constructors have for innovation. In the explanatory notes accompanying the bill the following is stated: 

The term economical properties according to this provision shall i.e. mean properties that meet size limits and price limits according to government regulations issued by the Minister and properties that are designed with respect to number of rooms relative to family size. There should also be an impetus for innovation in the construction of smaller economical properties for families. 

If real estate prices drop it is then evident that the principal of the Equity loan will also decrease. At the same time, the owner’s equity will also be reduced. The development has however trended in the direction that real estate prices have generally increased even though they may lower temporarily. 

An Equity loan is not interest bearing and will adjust in tune with the development of the price of the property and will maintain the same ratio that existed when the original lending was made. 

Example:  If the purchasing price of a property is ISK 40 m and the Equity loan (20%) is ISK 8 m.  If the property is later valued at ISK 50 m then the Equity loan (20%) will increase to ISK 10 m and will maintain 20% of the value of the property. 

The Equity loan has a term of10 years and in those instances where an Equity loan has not been repaid after that time has passed the Housing and Construction Authority (HMS) advisors will meet with the debtor, go over the situation and assess i.e. the mortgage status, liquidity and refinancing options. In the wake of this an assessment will be made with respect to whether the loan will be extended or if it is beneficial to refinance (further elaborated on in the government regulations).  

It is possible to extend an Equity loan for a period of 5 years at a time, up to three times. Thus, the total credit period can be up to 25 years. 

The purpose of Equity loans is to assist in the purchasing of a first time property and the act states that when a property is sold the loan will be repaid, therefore it will not be possible to transport an Equity loan onto another property.

(see more in regulation about Hlutdeildarlán : https://island.is/reglugerdir/nr/1084-2020)

Húsnæðis- og mannvirkjastofnun is authorized to grant approval for the temporary renting of a residential property that has been purchased with an equity loan, provided that the borrower has lived in it for a minimum of two years, due to:

Húsnæðis- og mannvirkjastofnun is authorized to grant an exemption from the condition of paragraph 2, that the borrower has lived in a residential building for a minimum of two years, when there is an urgent need for the borrower to stay away from his legal residence due to his or his family's special circumstances according to points c-e.