You have two options, to be shot or to be hanged

If you wanted to buy a home in Iceland in the last few years your options ranged between being shot or being hanged.

Most people have had to take home loans with price indexation where the amount you borrow increases according to the corresponding inflation. So if inflation is 5%, you add that amount to your loan. This is good for the lender who can buy as much for the money he’s received as he could have when he lent it out. For the borrower this is only good if the housing prices increase at a faster rate than inflation. Meaning that you can get a higher amount than your loan for selling your home. The danger is when recessions hit, borrowers are doubly whacked by increased payments, but lower equity in their home. Before 1983, vages were also indexed so that they rose with inflation, insuring the public with their home loans. The government then did away with the vage indexation to relief businesses from rising costs of labour. There is still no relief in sight for the public.  This is basically death by hanging, slow and painful.

In a global economy, people are obviously going to try to find the best option for their money. When inflation goes haywire as it has done in Iceland in the last few years, 10% and above, people start seeking ways to borrow in foreign currencies. Some individuals and businesses do so in order to borrow money where interest rates are low and put it to work where they are high, seriously skewing economies and the real worth of things but more on that in a later post perhaps. When the public has an option of borrowing in a 10%+ currency or a 3%+ currency the second option seems rather enticing. Then you have to take into effect currency fluctuations because you are obviously receiving your wages in one currency and paying your debts in another. In Iceland, the standard advise became, “if you can handle fluctuations between 15-25% then you should go with the currency loan option”. In the process you were handed a potential lottery ticket if your own currency strenghtened, lowering your debts at an incredibly fast rate. But when the fluctuation became 75-125% in the wrong direction, people’s debts and payments increased accordingly. This is how you quickly and brutally end up being shot.


2 Responses to “You have two options, to be shot or to be hanged”

  1. 1 Mister Floppy November 3, 2008 at 3:44 pm

    And the worst part is going to come when the prices of the houses and flats go to the ground because a lot of people is going to live this surrealist situation:

    They are going to own X money to the bank but the prices of the house they bought is going to be X/2 what means that there`s no point in keeoing paying it since they can buy a similar one and much cheaper.

    More and more since the central bank of iceland increased the interest rate from 12 to 18%, what means that the people who bought a house worth 26 millions of kronas and is paying a mortgage of variable innterest they have to pay now every month more than 400.000.

  1. 1 You have two options, to be shot or to be hanged | Home Equity Loan Blog Trackback on November 3, 2008 at 1:39 pm

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