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Top 10 Budget Friendly Hotels in Iceland

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Top 10 Budget Friendly Hotels in Iceland

Iceland is a dream destination for many travellers, thanks to its breathtaking landscapes, natural beauty and unique culture. However, it’s also known for being quite an expensive place to visit, especially when it comes to accommodations, so it can be hard to figure out where to stay in Iceland without overspending.

Don’t let that discourage you though, as there are still plenty of budget-friendly hotels in Iceland offering comfortable and convenient stays without breaking the bank.

If you want to start planning your visit to this magical North Atlantic country but are worried about your budget, keep reading to discover 10 of the best budget-friendly Iceland hotels. From charming guest houses in the countryside to modern hostels in the heart of Reykjavik, there’s something to suit everyone.

Whether you’re on a tight budget or simply looking to save some extra money on accommodation, these hotels offer great value for money without compromising on comfort or quality.

Afterwards, if you want an even more comprehensive guide on the different areas of Iceland, check out our Where to Stay in Iceland guide.

So, let’s dive in and discover some of the best places to stay in Iceland on a budget. For your convenience, all prices listed below are in US Dollars.

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Baron’s Hostel

Baron’s Hostel is one of the best cheap hotels in Reykjavik, Iceland. The owners are sweet and helpful, while the hostel itself is quiet, clean and comfortable.

Located in the heart of Reykjavik in a historic building close to the BSI Bus Terminal, Baron’s Hostel is an ideal starting point for exploring the city. It’s also close to Hallgrímskirkja Church, Reykjavík Art Museum Kjarvalsstaðir, and Sundhöllin Swimming Pool.

The hostel is within walking distance of several Bonus supermarkets and there is a shared kitchen and fridge you can use to prepare your own meals, helping you stay on a budget. A lovely breakfast, however, is already included, and there are even vegan options.

If you’re leaving early to start your day of sightseeing, you’ll be happy to know that breakfast begins as early as 2 am. For those who like a sleep-in, you can still grab something to eat until about 10:30 am. 

Other amenities at the hostel include a shared lounge area, free towels, shampoo and body wash, and fast WiFi. Some things to note are that there are no lockers in the rooms, no mirror or hairdryer in the bathrooms, and the reception isn’t manned at all times.

Yet, if all you’re looking for is a simple and clean place to sleep at night, Baron’s will meet your criteria. Prices range around the $60 per night mark, and you can choose between a mixed and a female-only dorm room.

Hallgrimskirkja church and Reykjavik cityscape in Iceland aerial view

Grótta Northern Lights – Apartment & Rooms

Grótta Northern Lights is a home away from home in Reykjavík and a great Iceland budget accommodation if you’re not into sharing a room with strangers. It’s a little outside of the city centre, but only a few minutes by car, or even walkable if you have the extra time.

The location is close to the Grotta Island Lighthouse in the Seltjarnarnes peninsula. It’s also within walking distance from the Church of Seltjarnarnes, the Northern Light View Point and the shoreline, as well as numerous parks and playgrounds.

At this accommodation, you get your own room with a comfy bed, a couch, a smart TV, a dresser, a shared bathroom with shampoo and conditioner, and a shared kitchen where a continental breakfast is offered.

Most rooms also come with beautiful views of the ocean. Standard rooms start at about $125 per night, and there are family rooms with private bathrooms available too for an additional cost.

The check-in process is simple as the property has digital locks on the doors, and the owners are very communicative, helping you out with finding things you might need and offering local tips. There is also free parking, and a group chat you can join with info about catching the Northern Lights.

Be aware that the airport shuttle bus will only drop you off about two kilometres away, so you’ll have to arrange further transport to get to the accommodation. The walls are fairly thin too, so you may hear other guests if they are loud or you are a light sleeper. Nonetheless, these are small prices to pay when staying at cheap hotels in Reykjavik.

The Reykjavík Free Church (Frikirkjan i Reykjavik) at lake Tjornin

Kex Hostel

If you ask any local about budget hotels in Reykjavík, Kex Hostel is sure to be recommended as it is one of the cheapest hotels in Iceland. The hostel was named after the Icelandic word for biscuit, as it is located inside a former biscuit factory.

While some of the industrial architecture remains, the interior also has a super cosy vibe with lots of interesting and unique decor. The hostel is 250 metres away from Laugarvegur shopping street, a 10-minute walk to Rainbow Street, and a kilometre away from the Sun Voyager landmark. It’s also right by the main Hopp electric scooter depot.

Room options range from mixed and female-only dorms to private and family rooms. While prices vary according to room type and the dates of stay, it’s possible to get a bed in a dorm here for as low as $35 per night.

There’s a spacious reception and hangout area with live music events from Thursday to Saturday, plus a bar and a restaurant with a delicious pizza menu. There are two guest kitchens as well if you prefer to cook your own meals.

Kex is quite a social hostel compared to others, so it’s a great place to stay if you’re travelling on your own or want to meet some fellow tourists and have a chat. With in-room lockers, luggage storage, 24-hour security and friendly staff, you and your belongings can feel perfectly safe here.

Some negatives are that the noise from the bar can travel upstairs, and a limited number of power points in the dorms means you might only be able to charge your phone in communal areas. The heavy doors also tend to slam, but if you’re a heavy sleeper, it shouldn’t be a problem.

Reykjavik, Iceland - Painted rainbow LGBT on street.

Ace Guesthouse

50 kilometres west of Reykjavik is Ace Guesthouse. It’s right next to Keflavík Airport, so it’s a good option if you’re arriving in Iceland late at night.

Blue Lagoon Iceland is less than a 20-minute drive to get to, while the Viking Museum is only four minutes away.

There are also plenty of restaurants and shops close by in the town of Reykjanesbær, with a supermarket, a bakery and a 24-hour deli only a short walk away.

The rooms are very modern, spacious and clean, offering a comfortable bed, a couch, a TV, a kettle, a desk and a private bathroom.

Prices vary depending on when you intend to stay, but can be as low as $106 per night. The owners are great at communicating and can organise a car rental or even airport pickup for you.

The only downsides are guests arriving and departing at all times throughout the night and the lack of a proper kitchen. However, there is a fridge and a microwave for you to heat your takeaway, as well as tea and coffee-making facilities.

Grindavík, Iceland - people on the wellness pool of Blue Lagoon at Grindavík on Iceland

Start Hostel

Another great accommodation near Keflavík Airport is Start Hostel. It’s a great base for exploring the area, and the Blue Lagoon is only about 20 minutes away.

This hostel is well soundproofed and the rooms are very quiet inside, with comfy beds and blankets provided.

There’s a communal kitchen, luggage storage, 24-hour reception and bike storage, and laundry can be done for a small fee. A buffet breakfast begins at 3:30 am, perfect if you want to get a head start on sightseeing or have an early flight to catch.

If you’re worried about your suitcase being over the weight limit, the staff can also lend you a scale. 

You can get a bed in a dorm for between $60-75 per night, or a private room with a shared bathroom for around $140 to $160.

There are also family rooms with private bathrooms that fit up to five people. Although it’s the closest hostel to the airport, it’s still a 10-minute taxi ride, which can cost about $27.

Keflavik Iceland- Rainbow Regnbogi sculpture stands in front of the terminal of Keflavik Airport.

Bank Guesthouse by KEF Airport

One of the best budget places to stay in Iceland is the Bank Guesthouse by KEF Airport. As the name suggests, it is next to the airport and is also located inside a former bank building. Since it was recently renovated, the interiors and facilities are incredibly modern and clean.

For an additional fee, the guest house offers a shuttle service to and from the airport. Check-in is also super easy, as you can simply enter the code you are given.

Room options include a comfortable twin, double or triple-bed with a shared bathroom, starting as low as $118 per night. Each room comes with a smart TV and a desk, plus access to a kitchen area where breakfast is served each morning.

The guest house provides to-go cups so you can take your tea or coffee with you in the mornings. The only negatives other than the communal spaces are the occasional road noise and the power outlets being far away from the beds. The WiFi is also a bit patchy, but this is not uncommon in Iceland.

Keflavik, Iceland - Directions (Attir) is a sculptural installation by Steinunn Thorarinsdottir.

Guesthouse Hateigi 2

One of the best hotels in Iceland for families if you’re not looking to spend a fortune is Guesthouse Hateigi 2. Located in Hella in the south of Iceland, this guest house is modern, comfortable, and great value for money.

While seemingly in the middle of nowhere, it’s not far off the Golden Circle route and offers both beachfront and mountain views.

The sunrises and sunsets seen from your window are gorgeous too. The directions to get here are easy to follow, with convenient self check-in and free parking right out the front.

A deluxe double room provides a double bed, a sofa bed big enough for two, a TV, and a private kitchen with everything you could need to cook your own meals and make your morning coffee.

The only negative is that you will have to share a bathroom with other guests.

At about $122 per night split between a few people, it’s a fantastic cheap accommodation in Iceland. The owner, Véronique, is very friendly and helpful too, and her genuine care for each guest really shows.

The facade of a wooden house surrounded by peat in Keldur near Hella

Paradise Cave Hostel & Guesthouse

If you’re looking for a budget hotel in a unique and unforgettable location, Paradise Cave Hostel & Guesthouse is the perfect option. This accommodation is found in Seljaland in the south of the island, only a minute away from the famous Seljalandfoss waterfall.

You can even see a second waterfall, Drifandii, from the backyard of the property. The guest house is also about 10 minutes away from the Vestmannaeyer ferry if you’re eager to explore the smaller islands of Iceland. This area is an amazing place to see the Northern Lights too.

In addition to the dorm room that sleeps up to 12, there are also twin, triple and quadruple rooms. You can get a bed in the dorm plus free breakfast for around $70 a night, while the private rooms are a little more pricey, of course.

Although the decor is quite simple, the guest house is very clean and the beds are comfortable. All rooms share a bathroom, but there are enough showers and toilets that you don’t need to worry about waiting around.

Best of all, there is a communal area to play some board games with fellow travellers and enjoy a beer or a glass of wine at the end of the day.

The delicious in-house restaurant is the best place to eat in the area, with super affordable and tasty options.

The staff are kind and cheerful with a clear passion for helping tourists see their beautiful country, and you’ll likely be served a welcome treat or meal upon arrival.

Aerial view of Seljalandsfoss Waterfall, Seljalands River and waterfall parking in Iceland.

Glamping & Camping

Easily one of the coolest places to stay in Iceland is Glamping & Camping in Vestmannaeyjar, a small island to the south of mainland Iceland. The accommodation offers a combination of traditional camping and more luxurious glamping options.

If you already own a tent or camper, you will only have to pay a small service fee to stay here. However, cosy twin-bed bungalows can be rented as well for only $55 to $75. 

Each bungalow comes with a little foyer to put your belongings, two lounge chairs, two lamps, power outlets and a mini fridge. Although there is heating and electricity inside, keep in mind that there is no running water.

However, there is a good communal area with a full kitchen and dining room plus laundry facilities. The only negatives to mention are the lack of bathroom mirrors and the close proximity of the bungalows.

The location is absolutely stunning, offering scenic views in every direction. Although this property is close to everything on the island, it is tucked behind a mountain range and feels more secluded than it is.

Attractions like Elephant Rock, the Eldfell and Helgafell volcanoes, and the world’s first open-water beluga whale sanctuary are all less than a 10-minute drive away.

View of the houses and buildings on the Heimaey Island of the Vestmannaeyjar Archipelago. Iceland

The Barn

The Barn is a modern and stylish hostel near Vik in the south of Iceland. It’s an ideal location if you are travelling the Ring Road, and it’s only 10 minutes away from Black Sand Beach.

Unlike most other hostels in Iceland, dorm beds here come with privacy curtains, power outlets and reading lights.

Everything is well-designed to limit unnecessary noise. Prices vary depending on when you stay, but typically range between $70 to $90 per night.

There are private rooms available too for an additional cost. The bathrooms, while shared, are very nice and clean, and the kitchen is also spacious enough to fit plenty of people during the breakfast rush. The WiFi is reliable and fast, which is rare for cheap hotels in Iceland.

Despite being considered a budget accommodation option, both the exteriors and the common spaces of the hostel feel quite luxurious.

The atmosphere is social yet laid back, with a chill bar and lounge area to hang out at in the evenings. There is plenty of room out the front for parking, where you can even watch the Northern Lights from.

If you stay in a private room, request one away from the downstairs common area as it can get noisy at night. You may also have to request fresh towels if you stay for a few nights.

Sea stacks of Reynisfjara Beach near Vik on Iceland

FAQ for staying in Iceland

What is the average cost of a hotel room in Iceland?

The average cost of hotels in Iceland varies depending on the location, time of year, and type of accommodation.

For a budget or mid-range hotel in Reykjavik, the average cost in USD can be anywhere between $120-200. The cheapest way to stay in Iceland is to book a hostel or a shared guest house. 

Is it cheap to stay in Iceland?

Iceland is generally considered to be an expensive destination to visit, and the prices of hotels, hostels and guesthouses are often higher than in most other European countries.

Food and drinks tend to be pricey too, as products have to be imported because of Iceland’s remote location. That being said, it is possible to stay in Iceland on a budget if you plan ahead and book cheap hotels in advance.

What part of Iceland is best to stay?

The best place to stay in Iceland depends on your preferences and interests. For those who prefer a city atmosphere, Reykjavik is a popular destination with a wide range of accommodation options, restaurants and attractions.

It’s also a great base for exploring the rest of the country. The Golden Circle is a popular choice for nature lovers, so you can’t go wrong with staying anywhere along this route.

Scenic curvy Iceland ring road within golden circle that connects the island popular tourist sites

Is it possible to travel around Iceland on a low budget?

It is possible to travel around Iceland on a low budget, but it does require a lot of planning and research in advance. One of the best ways to save money is by choosing cheap places to stay in Iceland, such as hostels, guesthouses or camping sites.

Additionally, cooking your own meals using local ingredients from supermarkets is a great way to save money on food, as dining out in Iceland can be pretty expensive.

Using public transportation, such as the bus system or local electric scooter rental, is another way to save money, as car rentals can really add up. Lastly, travelling off-season and avoiding peak tourist times can also help lower costs.

Could you recommend a cheap hostel in Iceland?

If you’re looking for a cheap hostel in Iceland, Kex Hostel and Baron’s Hostel in Reykjavik are both great options.

Are there any cheaper places in Iceland to visit than Reykjavik?

Yes, there are many cheaper places in Iceland to visit than Reykjavik. Akureyri in the north is Iceland’s second-largest city and is a more affordable alternative to Reykjavik.

It has a charming city centre, plenty of outdoor activities, and is a good base for exploring the surrounding region.

The eastern part of Iceland is also less visited than other areas but offers stunning natural landscapes, including fjords, waterfalls and glaciers.

The towns in this area tend to be more affordable than those in the south and west. There are also many smaller towns and villages throughout Iceland that offer a more affordable and authentic experience, with opportunities to connect with locals and experience Icelandic culture.

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Article written by:

Hi, my name is Samantha, Finance Managing Guru by day, Travel Blogging Enthusiast by... well... day too! Haha! Travelling King is the destination hotspot for the wannabe traveller! Showcasing affordable, luxurious getaways for the budget conscious! With the combination of my financial knowledge and travelling experiences I aim to show you, with a little planning, the right budget and a realistic goal you can fulfil your travel fantasies and explore the world whatever your budget or desires may be!