The Icelandic government yesterday announced an action plan aimed at reducing the country's housing debt. Firstly, the principal of indexed housing mortgages is to be written down and, secondly, tax breaks are proposed for private pension savings contributions originating after the action is implemented. It will be possible to apply private pension savings to reduce the mortgage principal; this route will be open to all housing mortgage holders regardless of the form of their mortgage. The actions are as follows:
Debt relief for inflation-indexed housing mortgages
Indexed housing mortgages will be written down by an amount equivalent to the indexation increase exceeding 4.8% which occurred during the period from December 2007 to August 2010. This is equivalent to a 13% adjustment to the consumer price index (CPI) used for indexation. The maximum amount of the write-down per household will be ISK 4 million. Around 90% of households entitled to debt relief will not be subject to a reduction because of this cap, i.e. the cap will not affect loans with an outstanding balance of up to ISK 30 million as of year-end 2010. Previous remedies reducing the loan principal from which the borrower has benefitted will be deducted from the amount of the correction. Those loans which are entitled to debt relief are inflation-indexed housing mortgages for purchase of real property for personal use. Debt relief will be provided on the borrower's initiative; the borrower will have to apply for it from his/her mortgage lender holding first lien rights on the date of application. It is proposed that this lender will be the administrator of the debt relief and handle its implementation as provided for in the methodology described in the report.
Tax exemption for personal pension savings
Those households with housing mortgages can use payments which would otherwise go to a private pension fund to pay down their housing mortgages. The Treasury will waive income tax on the wage earner's contribution of up to 4% together with the employer's contribution of up to 2%, if these funds are used to repay the principal of housing mortgages. The maximum tax exemption will be ISK 500,000 per annum. This remedy will apply for three years. The action is limited to persons who owed housing mortgages prior to 1 December 2013. Persons who have already been granted debt mitigation can avail themselves of the tax exemption for personal pension savings, enabling as many people as possible to benefit from the action.
Scope of the action
The total scope of these actions is estimated at around ISK 150 billion, spread over a four-year period. Of this, the debt relief applied to inflation-indexed housing mortgages is estimated at around ISK 80 billion and the utilisation of tax exemption on private pension savings at around ISK 70 billion. It should be pointed out that this estimate is subject to some uncertainty. The action requires the Treasury to serve as an intermediary in financing and implementing it. There is no need to establish a debt relief fund, as the action will be fully financed. The net impact on the Treasury is expected to be insignificant each year during the period 2014-2017.
The actions relieve economic uncertainty concerning household debt issues. Currently, household debt is equivalent to 108% of GDP, which is high by international comparison. In tandem with the debt reduction, the action will boost household disposable income and encourage savings by exempting private pension savings from tax. An additional incentive to investment will be created when households regain financial strength and have more scope for investment.
The principal conclusions of the analysis which the consultancy Analytica ehf. prepared for the group indicate that, based on the assumptions given, the macroeconomic impact of the actions proposed by the expert group will be relatively mild, although they could have a considerably stimulating effect on residential housing investment. The impact of the actions on individual economic indicators, based on Analytica's alternative forecast scenario, can be seen in the macroeconomic forecast of Statistics Iceland of November 2013.
Time frame of the actions
If the proposal is adopted as presented and the necessary amendments made to legislation, barring special difficulties, implementation of write-downs can be expected around mid-2014. Some preparatory time will be needed to recalculate mortgages. Actions regarding tax exemptions for private pension savings used to reduce the mortgage principal could commence at around the same time.