The euro could substantially reduce Icelandic mortgage rates, although adopting the common currency would not automatically solve the country’s housing problems. An analysis by economist Sigurður Jóhannesson suggests that borrowing costs in the euro area provide an indication of the rates Icelandic households might obtain after joining the European Union and eventually adopting the euro.
In February 2026, interest rates on non-indexed Icelandic mortgages ranged from 8.6% to 9.8%. In the euro-area countries examined by Jóhannesson, comparable mortgage rates were generally between 2.8% and 3.8%.
The difference is unusually large. It mainly reflects Iceland’s higher expected inflation, the risks associated with its small currency and the higher cost of funding faced by Icelandic lenders.
Icelandic mortgage rates remain far above euro-area levels
Jóhannesson, a specialist at the University of Iceland’s Institute of Economic Studies (Hagfræðistofnun Háskóla Íslands), compared Icelandic non-indexed housing loans with mortgage rates in countries that joined the euro from the beginning of the monetary union, or shortly afterwards.
Since Icelandic banks and pension funds began offering non-indexed mortgages in 2010, their nominal rates have consistently been higher than those available in the euro area. The size of the gap has varied.
Rates were relatively close in 2011 and early 2012, and again between the second half of 2020 and 2022. The difference has since widened.
The European Central Bank’s figures confirm the broader contrast. The average cost of new housing loans across the euro area stood at 3.37% in February 2026. It increased moderately during the following months, reaching about 3.48% in May.
Comparisons nevertheless require caution. Icelandic and euro-area figures may use different methodologies, while nominal interest rates do not account for differences in inflation.
Between 2010 and 2020, Iceland’s harmonised inflation rate was, on average, around half a percentage point higher than that of the euro area. Between 2020 and 2025, the difference was close to one percentage point.
Why the euro could make Icelandic mortgages cheaper
A common currency would remove the exchange-rate risk attached to the Icelandic króna and connect Icelandic lenders to a much larger financial market.
The króna is issued in a small economy that is particularly exposed to changes in tourism, fisheries, international trade and capital flows. Expectations that the currency may lose value can contribute to inflation and lead lenders to demand higher interest rates.
Under the euro, mortgage rates would instead be influenced by the monetary policy of the European Central Bank, funding conditions across the monetary union and the financial position of individual Icelandic borrowers and banks.
This would not guarantee that Icelandic households received exactly the same rates as households in Germany, Finland or France. Mortgage costs still vary considerably within the euro area because of differences in competition, banking systems, credit risks, taxes and mortgage contracts.
The experience of Greece is relevant in this respect. Greek mortgages have often been among the more expensive in the euro area, but their rates have generally remained within the broader range of other member states. Membership of the monetary union limits currency risk without eliminating country-specific financial conditions.
Lower euro mortgage rates could push house prices up
Cheaper borrowing would allow households to finance larger purchases with the same monthly payment. If the supply of housing did not rise at the same pace, stronger demand could initially lead to higher property prices.
Jóhannesson therefore expects that adopting a new currency and obtaining lower mortgage rates could make Icelandic homes more expensive, at least temporarily.
This is one of the main arguments against presenting euro adoption as an immediate solution to housing affordability. Part of the benefit from lower borrowing costs could be absorbed by higher purchase prices, particularly in Reykjavík and other areas where housing supply is already limited.
However, interest rates are not the only factor determining property values. Over the longer term, Jóhannesson argues, prices should mainly reflect construction costs and the price of land.
The OECD has described Iceland’s housing market as tight. Population growth and rising disposable incomes have maintained strong demand, while real house prices have increased more than in most other Nordic countries and across the OECD.
The implication is that Iceland would still need policies to increase housing supply. Planning procedures, access to land, infrastructure investment and construction capacity would remain central regardless of the currency used.
Euro adoption would also involve economic trade-offs
Critics of the euro frequently argue that Iceland would lose control over interest rates and would no longer be able to adjust monetary policy to its own economic cycle.
That concern is substantial. The Central Bank of Iceland (Seðlabanki Íslands) can currently raise or lower interest rates according to domestic inflation and economic conditions. The ECB instead sets one policy for the entire euro area.
A rapid expansion in Icelandic tourism or fisheries, for example, might create inflationary pressures at a time when the wider euro-area economy required low interest rates. Iceland could no longer respond through an independent policy rate or allow the króna to depreciate.
Yet monetary autonomy also has costs. A small currency can amplify economic shocks through exchange-rate volatility, imported inflation and higher risk premiums. Icelandic households ultimately experience some of those costs through expensive mortgages and more uncertain purchasing power.
Joining the euro would therefore exchange one form of flexibility for greater monetary stability. Iceland would retain other instruments, including fiscal policy, banking regulation, limits on household borrowing and measures designed to prevent housing bubbles.
The choice is not simply between complete national control and external control. Iceland already participates in the European Economic Area and applies much of the legislation governing the EU single market, while having no vote in the institutions that adopt many of those rules. Full membership would give Iceland representation in EU decision-making, although monetary policy would be shared with the other euro-area countries.
Iceland could not adopt the euro immediately
The debate also requires a clear distinction between resuming EU accession negotiations, joining the European Union and adopting the euro.
Iceland cannot formally introduce the euro as its currency without first becoming an EU member. It would then need to meet the economic and legal convergence criteria and participate in the exchange-rate mechanism before entering the monetary union.
Icelanders will vote on 29 August 2026 on whether to resume accession negotiations. A vote in favour would not approve EU membership or euro adoption. Any final accession agreement would be submitted to voters in a second referendum.
Questions concerning fisheries, agriculture, sovereignty and the terms of Iceland’s participation would therefore be addressed during negotiations rather than settled by the August vote alone.
The mortgage comparison does not establish that adopting the euro would be an unqualified financial gain. It does, however, indicate that the króna and Iceland’s inflation outlook impose a measurable cost on borrowers.
Lower rates could ease monthly mortgage payments, but they could also raise housing demand and prices in the short term. The longer-term outcome would depend on whether Iceland increased construction, controlled financial risks and secured accession terms considered acceptable by its voters.
The effect of the euro on Icelandic mortgages is therefore best understood as part of a broader choice. Iceland would give up an independent currency and national interest-rate policy in exchange for access to a larger and more stable monetary system. For many households, the difference could be visible first in the cost of their home loan.
