Interest subsidy is paid to individuals who pay interest on loans for the purchase or construction of a residential property for their own use. This also applies, subject to certain conditions, to individuals who have purchased a housing right or a share in a rent-to-own property. Entitlement to interest subsidy is established in the year when the property or share is purchased, or when construction begins.
Interest subsidy is paid out at the end of May, in connection with the annual tax assessment.
To be eligible for interest subsidy, all of the following conditions must be met:
The interest expenses must relate to loans for the purchase or construction of a residential property for personal use
The owner must have full tax liability in Iceland or be tax resident in Iceland
Interest and indexation on interest installments must have been paid
Personal use means that the owner lives in the property themselves.
Amount of interest subsidy
The amount of interest subsidy is calculated based on interest expenses, income and assets at year-end. Different maximum amounts and reduction thresholds apply depending on household type.
By entering your household status and information on income, assets and debt you can calculate your interest subsidy.
Interest expenses on the following loans qualify for interest subsidy:
Loans for the purchase or construction of a residential property for personal use
Loans taken to refinance or repay older loans related to residential property for personal use
Loans for the purchase of a housing right or a share in a rent-to-own property (interest charged as part of rent payments may also qualify)
Loans from the Housing Financing Fund for renovations of residential property (interest on comparable loans from financial institutions does not qualify)
Refinancing
If an older loan taken for the purchase or construction of a residential property for personal use qualified for interest subsidy, a new loan will also qualify if it is taken to repay the original loan.
If the new loan is higher than the original loan and only part of it is used to finance the residential property, this must be reported in the tax return. Only the interest and indexation relating to the portion used for the property can be included when calculating interest subsidy.
Short-term loans
Interest expenses on loans with a term of less than two years may qualify for interest subsidy, but only:
For the next four years (income years) from the year of purchase, based on the date of the purchase agreement, or
For the next seven years from the year construction begins, or until the year the property is first occupied, if later
Interest expenses on mortgage loans and loans with personal guarantees from financial institutions that were originally taken for two years or longer are not subject to these time limits.
Loans for housing rights
Individuals who have purchased a housing right or a share in a rent-to-own property are entitled to interest subsidy for interest included in rent payments and interest on loans taken to finance the purchase of the housing right or share.
If this information is not pre-filled, the tenant must contact the landlord and request form RSK 3.08 to be completed and submitted with the tax return. Interest expenses from the form should be reported in box 166, and outstanding loan balances in box 167.
Loan restructuring due to default – loan freeze – deferral
If a loan in default is restructured into a new loan, any overdue interest and indexation are considered both due and paid in the year they are added to the principal, provided this is done within the same year as the original due date.
If a loan is frozen under terms where repayments are deferred for a certain period, and the principal is increased annually by the interest and indexation on the deferred payments, that increase is considered a payment of interest expenses for the year, provided this is done through a formal agreement.
Information on the amount of interest and indexation added to the principal will be shown in statements from the lender.
Special circumstances
Special rules may apply to the calculation and amount of interest subsidy in certain situations, such as purchase of a new property, changes in personal circumstances or marital status and temporary relocation abroad.
When determining interest subsidy for the year in which a residential property is acquired, and no interest subsidy was received in the previous year, the calculation is based on the quarter in which the first mortgage loan is taken.
Maximum interest expenses, the income base and the maximum subsidy are then calculated proportionally.
For example, if the property is purchased in the second quarter, the calculation is based on 3/4 of the annual amounts, and so on.
The right to interest subsidy does not automatically lapse if the owner does not use the property themselves, provided this is due to temporary circumstances, such as studies, illness or work-related reasons.
The owner must demonstrate that the property will be used for personal use again within a certain period. As a general rule, temporary circumstances should not exceed three years, although this may be extended to five years in exceptional cases.
The owner is responsible for providing evidence of such temporary circumstances.
As a general rule, the owner is not entitled to interest subsidy for a residential property that is rented out, whether for a short or long period.
If the owner chooses to rent out the property, for example due to financial reasons, the conditions for interest subsidy are not met, as the property is not used for personal residence.
Students who stay abroad for studies may be entitled to interest subsidy during their studies. To qualify, they must apply for tax residency in Iceland through their tax return.
The following documents must be submitted with the tax return:
Confirmation of income or lack of income abroad. For married or cohabiting individuals, information on the income of both parties must be provided. A copy of a tax return or tax assessment documents showing income abroad must be included.
Confirmation of studies
Interest subsidy is determined based on the tax return. For married couples, information on the income of both parties must always be provided.
Individuals who move to Iceland and have full tax liability in Iceland for part of the year may be entitled to interest subsidy for that period, provided they pay interest on loans for a residential property for their own use.
Interest expenses that fall due before moving to Iceland or after leaving the country are not included in the calculation of interest subsidy.
Individuals who are resident in the European Economic Area (EEA), in an EFTA member state or in the Faroe Islands may be entitled to interest subsidy if at least 75% of their total income in the income year is earned in Iceland.
This right only applies if the individual has exercised their option to be taxed in Iceland.
The right to interest subsidy is limited to one residential property for personal use. Only interest expenses on loans used to acquire that property are included in the calculation.
This also applies to jointly taxed cohabiting partners who each own a property. Only the loans related to the property they live in qualify for interest subsidy.
New construction or renovation of a new property
An exception applies if loans are taken for a property under construction intended for personal use, before the previous property is sold. The same may apply when an older property is purchased and renovated immediately after purchase.
As a general rule, entitlement to interest subsidy for the previously owned property ends as soon as the owner moves out or the property is sold, whichever occurs first.
Entitlement may also continue in cases of temporary ownership of two properties, regardless of the stage of construction, where a sale is not possible due to unusual conditions in the real estate market. This refers to general market conditions, not difficulties in selling a specific property.
In such cases, the right to interest subsidy may continue for up to three years, and renting out the property does not affect the entitlement.
The owner must demonstrate that efforts have been made to sell the property and that there is an intention to do so.
When a marriage is established, interest subsidy is calculated as for married couples for the entire year, provided the conditions for joint taxation are met at year-end.
The same applies to cohabiting partners if the conditions for joint taxation are met at year-end, regardless of whether joint taxation is formally requested.
This also applies to individuals who can demonstrate that they live together and share a household, even if the formal conditions for registering cohabitation are not met.
In the event of divorce or the end of cohabitation, the calculation of interest subsidy depends on how the tax return is filed. There are two options:
Submit a joint tax return for the part of the year when the conditions for joint taxation were met, and separate returns for the remainder of the year
Submit separate tax returns for the entire year
If the first option is chosen, interest subsidy is calculated as for married couples during the period when the conditions for joint taxation were met. For the remaining period, it is calculated as for an individual or a single parent, as applicable, for the person living in the property.
If the second option is chosen, interest subsidy is calculated based on each individual’s marital status at year-end, without regard to the income or interest expenses of the former spouse or partner. Joint interest expenses up to the time of separation are divided equally.
After the death of a spouse or cohabiting partner, where the conditions for joint taxation are met, the following options are available:
The surviving spouse may file a joint tax return including both their own income and that of the deceased for the year of death
The surviving spouse may file a joint tax return up to the date of death, and a separate return for the remainder of the year
If the second option is chosen, interest subsidy is calculated as for an individual or a single parent from the date of death until the end of the year. In such cases, a separate tax return must also be filed for the deceased’s estate from the date of death until the estate is settled. This option is not available if the surviving spouse has permission to remain in an undivided estate.
If the surviving spouse remains in an undivided estate, interest subsidy is calculated as for married couples for up to five years after the death.
If the surviving spouse enters into a new cohabitation, interest subsidy is calculated as for married or cohabiting partners once the conditions for joint taxation are met.
