How The Hell Do I Save For A House?

With half of Reykjavík’s residents splurging way too much on their monthly mortgage payments and the other half renting all sorts of converted structures – garages, basements, and even closets – the housing market has never looked more gruesome. Trying to crack the code of how one can start saving for a property today, we spoke to Jóhannes Eiríksson, CEO of Aurbjörg, a fintech company that helps to manage personal finances.

“Look at your income, your salary and spending. From these variables, you can see how long it would take to save for a house.”

GV: What are some practical tips for how one can save for a house in Iceland?

You need to start thinking about savings from the very bottom — what are your savings based on? For most people, they are based on your monthly salary. You need to look at your overall income after taxes. Once you subtract the regular expenses from the net income, then we can start to talk about savings. There may be some opportunities in the markets to increase the net you have at the bottom. You can, of course, try to increase your salary, but then you need to sit down with your employer and try to negotiate a higher salary. But you can also take a look at your expenses. There are some opportunities in the market to do better. I can take myself for example, I saved 180k ISK per year by switching insurance companies.

It can be beneficial for people to pay extra pension payments (Viðbótarlífeyrissparnaður/Séreignarsparnaður) of their salary each month. You can choose between 2% and 4% of your gross salary, and if you choose to pay these extra pension payments, then your employer is obliged to add 2% on top of their payments (which effectively means a salary increase). First-time buyers can then use these extra pension payments as tax-free down payment or equity contribution for their new real estate and/or tax-free payments towards the principal of the mortgage (thereby reducing their monthly mortgage payments) – up to a certain limit. The latter option can not only be used by first-time buyers but other real estate owners as well.

These extra pension payments are an addition to the mandatory pension payments people need to make of their salary each month, and each individual needs to make a decision on whether to make those additional payments or not.

GV: Is it possible to save for a property with a single income?

Everything is possible. But realistically speaking, it’s difficult and is becoming more and more difficult because houses in Iceland are becoming more expensive. Each month, every year, inflation is on the rise and has been on the rise. It’s becoming more difficult, especially for young people to enter the market.

What is the other option? You’re renting. You need to weigh the costs and benefits of each option. In some cases, the rent is equally as high as a mortgage payment. But you are paying this money to your landlords and not benefiting by getting an asset in return. Whereas if you’re paying off your mortgage, you can say that you are investing in the house.

If you’re buying a property for the first time, most banks or lenders will need you to have saved a minimum of 15% of the purchase price. If you have a property that selling for around 60 million ISK, then you need about 9 million ISK in your bank account. Again, you need to look at your income, your salary and spending. From these variables, you can see how long it would take to save for a house. The housing prices tend to increase in price over a longer period of time. A 9 million ISK down payment today, might mean 10, 11 or 12 million in a few years’ time. You need to take that into account.

Photo by Art Bicnick

In the current economic situation, it is extra difficult for young people to enter the market, but at the same time, there are more opportunities for savings. People are getting more interest on their savings. Recently, for example, the limitations on indexed savings accounts were relaxed a bit.

Salaries in Iceland have also been increasing quite a lot over recent years. But again, inflation has been rising and the cost of living is increasing from month to month. The sooner you can enter the market, the better.

GV: What are the potential mistakes to avoid when trying to save money?

Look into what you are spending your money on. Do you need to go out for lunch? Or can you eat at home? Do you need all the subscriptions? Netflix, Disney+, Hulu – do you really need that? Can you take the bus or jump on a Hopp rather than owning a car?

Basically, just be conscious about how you’re spending your money.