Some might think one is throwing away money by renting instead of paying off a mortgage. On the other hand the cost of borrowing money is pretty high and most of your monthly payments don’t cover more than the interests. Therefore the amount you owe doesn’t decrease every month. It can just as easily increase. You will also have to take into account the cost of maintenance and property taxes among other things.
When it comes to housing in Iceland, each case is unique. The variables are countless and sometimes it seems no one can predict the future in the Icelandic economy. Inflation predictions are unreliable to say the least and the state and future of the Icelandic króna is under constant debate. However, there are many different kinds of loans available. The interest rates, inflation rates and your own equity amount are variables one needs to consider before becoming a real estate owner in Iceland.
Given that John and Jim have 5,000,000 ISK each
Jim lays his 5,000,000 kronur in an indexed savings account (sparibók) bearing a 3.5% interest rate. John, on the other hand, buys a flat for 25 million and receives a loan for 20 million for 30 years. Jim has to pay 130,000 kronur in rent. Jon has to pay the same amount when everything is taken into account: repayment of loans, insurance and the mortgage interest relief he gets in return.
Four years pass and inflation is 6%,
And Jim has 7,000,000 kronur in his account. John’s loan however has jumped to 24 million kronur but market price has risen evenly with the inflation and his house is now valued at 31 million. Technically speaking, John did not make money but the amount he owes has risen - but it is an investment and could now potentially sell the property with some profit.
Evaluation needed every time.
People who have high mortgage payments and are paying off a relatively low loan might be better off buying than renting. Again renting might be a better option for those who would have to borrow the full amount in the meantime collecting their savings in a low risk account.
Based on an article on the Arion Bank website.
This article is written in cooperation with Áttavitinn