Indexation, or index-linking (verðtrygging), is when the amount of a loan or deposit is tied to a price index, so it rises and falls with prices. In Iceland the index is the consumer price indexConsumer price index (CPI)Statistics Iceland's measure of the prices of goods and services that households buy. It measures inflation and is the basis of indexation. calculated by Statistics Iceland, under Act No. 38/2001 on Interest and Price Indexation. Indexation is unusually widespread in Iceland compared with neighbouring countries.
Why was it introduced?
In the 1970s, InflationInflationA general rise in prices over time, which means each króna buys less than before. in Iceland was enormous and interest rates didn't keep up. Savings melted away, and borrowers in effect repaid only part of their loans. With the so-called Ólafslög in April 1979, general indexation of financial obligations was introduced so that lenders would get the real value back.
How does an index-linked loan work?
An index-linked loan has two kinds of cost:
- Interest, which is lower than on a non-indexed loan. It is in effect a real interest rateReal interest rateThe interest rate minus inflation. Real interest shows whether savings are really growing in value or shrinking, even as the number of krónur rises..
- Indexation adjustments (verðbætur), which are added to the principal every month in line with the rise in the index.
Payments are lower at first than on a comparable non-indexed loan. On the other hand, the principal rises with inflation, and in the early years of a long loan the debt can grow even though you make every monthly payment.
A non-indexed loan has higher interest and higher payments at first, but the principal falls steadily. According to the Central Bank, about 59% of outstanding household mortgages were index-linked in October 2024, while most new mortgages in the first half of 2026 were non-indexed.
Index-linked savings
Banks also offer index-linked deposit accounts. The balance follows the index, so inflation doesn't erode the principal. These accounts are usually tied up for a set period. The government also issues index-linked bonds.
Indexation is controversial and has often been debated in the Althingi. Some see it as essential protection for savings, others say it shifts inflation risk onto households. Which suits better depends on each person's circumstances.
Everything in Myntkaup Learn is written and regularly reviewed by the Myntkaup editorial team. It is for education and is not investment advice. Editorial policy. Updated 2 November 2026.