Equity loan

An equity loan is a new solution for low-income persons and individuals with limited assets.

This type of loan is intended to aid first time buyers who are below a certain income possibility curve in order to enable them to bridge the equity gap when buying real estate property

  • The buyer will only have to deposit 5% of the purchase price on the down payment. 
  • The buyer gets a mortgage for 75% of the purchase price. 
  • The Housing and Construction Authority (HMS) lends to the buyer an Equity loan for 20% of the purchase price. 
  • The buyer’s capital advance always remains 5% but low-income groups will be able to get up to 30% Equity loans. 

There is no interest or instalments to be paid on Equity loans, however the borrower will repay the loan when he sells the property or upon termination or maturity of the loan. The Equity loan is provided for a 10-year period, but it is permitted to extend the credit period for period of five years at a time for a total maximum period of 25 years. The Equity loan is linked to changes in the market value of the property and the repayment amount will increase and decrease according to changes in the market value of the property. 

Who are the in­tended equity loan recipi­ents?

An Equity loan is a remedy in aid of those who need assistance to be able to enter the real estate property market. Those who qualify are first-time buyers, and those who have not been owners of real estate property during the preceding five years and who are below a certain income limit. This way an Equity loan will help individuals / married couples / cohabitants to be able to build equity instead of being stuck in the rental market or in their parents’ home. 

An Equity loan is intended for those who are able to pay instalments on a mortgage but are however not in a position to pay the down payment without assistance. Furthermore, it is required that instalments on the mortgage do not exceed 40% of disposable income. 

It is required that the borrower/borrowers have legal domicile in the residential property that was purchased with an equity loan while the property is being financed with an equity loan, and it is not permitted to rent it out without the approval of the HMS (see more information in Q&A)

App­licants need to be below a certa­in income limit in order to qu­ali­fy for a 20% equity loan

Applicants who qualify for a 20% Equity loan need to pass a credit rating procedure for at least a 75% mortgage for a term of 25 years. 

App­licants with even lower income will qu­ali­fy for up to a 30% equity loan

Applicants who qualify for a 30% Equity loan need to pass a credit rating procedure for at least a 65% mortgage for a term of 25 years. 

An example of the repa­y­ment of an equity loan

The borrower repays the Equity loan when he sells the property, or upon termination or maturity of the loan and the amount of repayment will depend on the market value of the property at the time of repayment. The Equity loan will therefore follow changes in the value of the property. 

A property that was purchased for ISK 40 million with a 20% Equity loan of ISK 8 million: 

  • If the same property has increased in value and is resold for ISK 45 million, the Equity loan increases accordingly and increases to ISK 9 million. 
  • If the same property has decreased in price and is resold ISK 35 million, the Equity loan increases in accordance with this and drops to ISK 7 million. 

Which properties qu­ali­fy for equity loans?

Lending is provided for new builds or properties outside the capital area that have been greatly renovated.  

Properties that qualify for loans need to be economical and the price limits for properties are based on number of rooms. The final price limits still need to be worked out, but the plan is to look rather at family sizes rather than at the number of square meters and thereby widen the options that the constructors have for innovation. Price limits will be announced later. 

This arrangement supports new construction of economical properties and it improves planning by government and construction enterprises. Furthermore, a property will have to be built by a contractor who has made a contract with the Housing and Construction Authority (HMS). 

Question and answer about equity loans