Iceland interest rates hit 18%, bad news for home loans

Iceland interest rates hit 18%, bad news for home loans?

After suffering an economic meltdown in October Iceland is showing further signs of financial upheaval by raising the base line interest rate of the central bank to 18%. That means a 1% increase from the previous maximum of 17%. What does this mean for Iceland? What does it mean for the world economy? And how does, if at all, that affect you?

First the caveats. This website does not presume to foretell future market trends or results. Even those that pretend to predict market performance, as seen rather graphically in the last months, fail often. This website has less lofty but longer lasting goals. We aim to provide accurate and reliable information on everything related to home loans and mortgages. Again we would not recommend you follow our guidelines or suggestions as a personal guide to investing and home loan management, just as we wouldn’t recommend you use an Economics textbook to mastermind your stock market investments. Doesn’t mean the Economics textbook is not accurate or worthwhile, it just isn’t what the tool is meant to be. We have the rather modest of helping you understand the basics of home loans and mortgages and let you make your own choices.

After this rather long caveat let’s continue with the theme we are discussing. What does a new maximum interest rate of 18% mean for Iceland?

When interest rate climbs it can mean various things. It means money is more expensive. Or put in a different way it costs more money to borrow money. This has an adverse effect on new business and entrepreneurship in general. It is generally thought to slow down the economy. However in economic crisis’ where the credit system is under jeopardy and loans are simply not being paid it is nearly unavoidable to raise interest rates to hedge investments.

On the flip side, higher interest rates will mean that people who have saved money will get higher interest for their savings. Great news for those who have spent conservatively and not invested recklessly. Raising the interest rate also has the effect of slowing down the Real Estate market, as less people can afford to buy homes with higher interest rates. The long term effect of this is not clear. Sometimes economies turn a cycle with a rise in interest rates providing a come back for home sales mortgages and home loans. On other occasions the increase in the interest rate causes the industry to go deeper in trouble.

How does that affect the world and you personally? It is obvious that bad economic performances by developed countries (and undeveloped for that matter) can be the prelude for trouble in other countries. As the whole world is shifting into a depression it is not clear if Iceland is reacting to the worldwide trend or introducing a new turn of events.

What does seem clear is that if your are planning to buy a home, not a terrible idea if you have the credit score and collateral, you must take into account the clear possibility that interest rates will raise in the short to midterm and you must make sure you can afford the possible raise in the cost of your home loan.