Letter of intent represents key milestone

Arion Bank believes that the agreement reached by the government, pension funds, the Housing Financing Fund and financial companies on a broad range of measures to tackle household debt is of great significance. All lenders on the property market and the authorities have now made a joint effort to devise solutions and procedures to deal with problem debt.

Arion Bank has for some time offered debt solutions to individuals and households and approximately 4,000 customers have already taken advantage of such measures. As a result the bank has written off ISK 12.8 billion in property loans to households. Arion Bank has set up a new advisory service designed to help individuals in financial difficulties. The goal is that within a few months everyone experiencing difficulties in paying their debts should have had their debts problems sorted out.

The bank encourages its customers to contact their local branch to see how the available measures can help them.

The main points of the agreement are:

Measures to help over-mortgaged households

Borrowers with over-mortgaged properties can have their outstanding debt reduced to 110% of the value of the property. There are limits on how much debt can be reduced. Firstly, individual borrowers can have their debt reduced by a maximum of ISK 4 million and married couples/registered partners and single parents by a maximum of ISK 7 million. The aim is to process such cases quickly. Higher reductions in debt - a maximum of ISK 15 million for individual borrowers and a maximum of ISK 30 million for married couples/registered partners and single parents - require a much more thorough evaluation of assets and a credit assessment.

Special debt adjustment

Following changes to the special debt adjustment process even more households will be able to take advantage of this measure. Borrowers experiencing severe financial difficulties will be given the opportunity to reduce their loans to 70% of the value of their property, depending on how much they can afford to pay. The customer can take an interest-free and instalment-free loan of up to 30% of the value of the property and debts in excess of 100% of the value of the property are written off.

Higher interest allowance

Approximately ISK 2 billion will be used to support the increase in interest allowance in 2009 and 2010. General interest allowance will also be changed so that it can be increasingly used to help low to mid-income households with high debts.

Temporary interest subsidy

A new temporary subsidy will be introduced to pay interest expenses on property loans. The subsidy will be the same to all borrowers, regardless of income, and is cancelled once a borrower's net assets reach a certain point. This is likely to reduce household debt payments by approximately ISK 200,000 - 300,000 a year. This new measure will cost around ISK 6 billion a year and will apply in 2011 and 2012. The government and the parties to the agreement will examine ways for the financial companies and pension funds to meet these expenses.

Special campaign to help households defaulting on loans

Lenders will endeavour to reach all households defaulting on loans and to offer them appropriate solutions before 1 May 2011. A special unit will be set up to expedite the processing of cases and all measures will aim at avoiding auctions of properties.

Social housing solutions

Lenders will work closely with the government, local authorities and NGOs to establish a wide range of housing solutions. The pension funds will facilitate these measures by buying a special class of housing bonds at the lowest possible interest rate. The government will not cut its rent allowance next year.