Interest is the price of money. Whoever borrows pays interest, and whoever lends receives it. Interest is usually given as a percentage of the amount per year. If you put ISK 1,000,000 in an account paying 5%, you earn ISK 50,000 in interest over a year, before tax.
When you put money in a bank, you are really lending it to the bank, which pays you deposit interest. When you take out a loan, you pay lending interest. The gap between the two is one of the banks' main sources of income. When interest is added to the principal and starts earning interest itself, that is called compound interestCompound interestInterest calculated on interest already earned. The amount grows faster and faster over time, whether it is savings or debt..
What sets interest rates?
- The policy ratePolicy rateThe Central Bank's interest rate that other rates in Iceland follow. The bank calls it its key rate and moves it to keep inflation in check.. The Central Bank's rate is the base that other rates in the country follow.
- Risk. Lending to a riskier borrower calls for a higher rate. That is why overdrafts and credit cards cost far more than mortgages, where the home is the security.
- Time. Money tied up for a long time often earns a different rate from money you can take out whenever you like.
- Inflation. Lenders want back more than inflation eats away. What is left is the 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..
Fixed, variable and index-linked
- Fixed rates stay the same for a set period.
- Variable rates change, usually in step with the policy rate.
- Index-linked loans carry lower interest rates, but the principal rises with the consumer price index. This arrangement is common in Iceland and is called IndexationIndexationWhen the principal of a loan or deposit follows the consumer price index. Indexation protects savings from inflation but makes debts rise with prices..
Interest and crypto
Bitcoin pays no interest. Interest rates still often affect crypto prices, though. When rates rise, deposits and bonds become more attractive and less money flows into risky assets. In 2022, central banks around the world raised rates quickly, and at the same time most risky assets fell, crypto included.
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.