After a rough 2020 dominated by the COVID-19 pandemic and its economic fallout, 2021 appears to be a year that will see relatively stable and low interest rates. With significant risks to the economy still in play and inflation under wraps, rates are unlikely to move much higher in the year ahead. Plus, the Federal Reserve has promised not to raise rates through 2023 to support a recovery.
Last year was a roller coaster that saw the pandemic and associated lockdowns throw the U.S. economy into recession. As the pandemic set in, the Fed acted quickly to institute emergency rate cuts, increased its purchases of debt and created numerous lending facilities to help get credit out to those who needed it. Markets stabilized, debt prices firmed up and stocks soared.
Now rates are expected to be largely range-bound, at least those that the Fed can control.
“The fed funds rate is pinned to the floor of 0 to 0.25 percent until 2023 or so, but an equal part of the Fed’s strategy is keeping longer-term interest rates low,” says Greg McBride, CFA, Bankrate chief financial analyst.
While short-term rates are anchored to the floor, the Fed has a number of tools at its disposal, in particular purchasing debt, which can help push rates to where the Fed wants them to be.
“Expect the Fed to shift to more purchases of long-term bonds in an effort to keep a lid on mortgage rates in particular and facilitate more mortgage refinancing,” says McBride. He says lower mortgage rates should have some significant beneficial effects for consumer spending.
“When millions of homeowners can cut their payments by $150, $200, $300 or more per month, that has a very stimulative effect on the economy,” says McBride.
Still, he expects the 10-year Treasury note to tick up by the end of 2021, from its current rate around 0.94 percent to 1.25 percent. The 10-year Treasury is important because it helps set interest rates for a variety of consumer financial products, including mortgages.
And with the economy still in active recovery mode, the Fed continues to support the rebound with highly accommodative monetary policy.
Jump to Bankrate’s predictions for:
- Mortgage rates
- Home equity rates
- Savings, money market and CD rates
- Auto loan rates
- Credit card rates
Mortgage rates to start low, then climb
As interest rates plunged in 2020, mortgage rates slid as well, making homes more affordable and leading to a surge in demand. In some cases, demand for mortgages was so high that lenders could not keep up, and advertised above-market rates to slow the flood of borrowers.
But for most of 2020, mortgages rates continued a steady downtrend as rates caught up with the plummeting yield on the 10-year Treasury note. Typically mortgage rates track the yield on this government bond, but they have an additional “spread” on top that increases their rate.
But that steady downtrend looks set to reverse in 2021, says McBride, though with a head fake to kick off the year.
“It will be an especially volatile year for mortgage rates, with fixed rates falling to even lower lows early in 2021 on economic concerns but rebounding in the back half of the year as widespread vaccinations lead to a surprisingly strong surge of economic activity and the inflation worries that come with it,” he says.
McBride foresees average 30-year fixed mortgage rates at 3.1 percent, up slightly from 2.95 percent in the week of Dec. 23. Despite the predicted uptick, rates would remain tremendously low by historical measures.
And the Fed will likely help keep a lid on too-swift increases in mortgage rates.
“Any large increases will be snuffed out by the Fed’s buying of more long-term bonds and competition among lenders that brings mortgage-Treasury spreads closer to historical norms,” says McBride.
So for those who are able to take advantage of the low rates, it may be a great time to do so.
For more details, read Bankrate’s 2021 mortgage rate forecast.
Home equity rates may dip
“Homeowners with existing home equity lines have no need to worry about rates rising with the Fed committed to ultra-low short-term rates,” says McBride.
With only modest upward pressure on the 10-year Treasury note and lenders aggressively trying to plump their business, home equity rates may fall as 2021 rolls on. That would follow a year in which home equity rates dropped after the Fed’s rate cut, and then flatlined before a small year-end surge.
“The average rate available for new borrowers will be lower by year-end as home equity lenders trot out new introductory offers, particularly later in the year, should mortgage refinance activity wane,” says McBride.
When it comes to home equity loans, “lenders continue to shy away from this product,” says McBride. “Those that remain will get more competitive as the year rolls along.”
He expects the average HELOC rate to come in at 4.61 percent, while the average home equity loan should clock in at 5.05 percent.
For more details, read Bankrate’s 2021 home equity interest rate forecast.
Savers still won’t catch much of a break
Interest rates on CDs and savings accounts plummeted when the Fed slashed interest rates in March and then continued trending lower as even the more competitive-yielding banks gradually reduced their rates, too. And savers shouldn’t hold out much hope for positive changes in 2021.
Part of the cause is that bank deposits swelled by trillions of dollars in 2020 as money rushed to safe assets, pushing rates lower and allowing banks to reduce what they pay depositors.
“Even at rock-bottom interest rates, banks have been inundated with deposits just as loan demand dropped off,” says McBride. “That dynamic isn’t going to change appreciably for much of 2021, though a stronger rebound in economic activity and loan demand in the latter part of the year could give yields on savings and CDs a little boost.”
“Unless and until that happens, returns on savings accounts and money market accounts will be flat to slightly down, while CD yields meander aimlessly,” he says.
A one-year CD should average 0.22 percent nationally in 2021, though savvy savers could find an average rate of 0.55 percent for top-yielding, nationally available CD offers. A five-year CD should average 0.36 percent nationally, or 1.1 percent at top-yielding banks.
Money market and savings accounts should average 0.75 percent in 2021 for top-yielding nationally available accounts. However, the national averages should be much lower for savings (0.07 percent) and money market accounts (0.1 percent).
Rates on auto loans to decline, but slowly
Low overall interest rates helped the rates on auto loans move lower in 2020, and that trend should continue in 2021. But competitive dynamics should help put more pressure on rates, too.
“The backdrop of low interest rates and a recovering economy will bring about an easing of terms, especially rates, as competition heats up,” says McBride.
But don’t expect any sudden moves, he says. “We’ll see rates for both new and used car loans trending lower throughout the year, but at a snail’s pace.”
McBride expects rates to average around 4.08 percent for new-car loans and 4.75 percent for used-car loans.
For more details, read Bankrate’s 2021 auto loans forecast.
Credit card rates expected to move higher
Credit cards may break differently from other financial products, with some rates going higher and others lower. The change won’t really be driven by rising underlying rates, but rather by a tough economy where some consumers are doing fine but others are having significant trouble.
Credit card rates should average 16.15 percent at year-end, predicts McBride, and that’s still well below where they started in 2020, north of 17 percent.
“Existing cardholders won’t have to worry about their interest rates changing as the Fed intends to hold benchmark interest rates at current levels through 2021 and beyond,” he says. “As for the rates being marketed to prospective cardholders, increasing delinquencies and defaults will lead to a bifurcation.”
This divergence will be based on creditworthiness and perceived risk of individual consumers.
“Issuers will increase the rates being offered to consumers with weaker credit and more debt to compensate for risk, while at the same time getting more competitive with lower rates and enhanced rewards for consumers with strong credit and deemed to be at lower risk of default,” he says.
Despite this split, McBride still sees credit card rates climbing in 2021. “Net result, the average rate will move up despite an otherwise static rate environment,” he says.
For more details, read Bankrate’s 2021 credit card rate forecast.
Knowing where we are in the economic cycle and where we’re likely to be over the coming year can help you plan your own financial moves. For example, those looking to score a great mortgage rate may still have quite a bit of time without feeling pressured to buy and miss out. Meanwhile, those relying on savings accounts and CDs should know that they can’t expect rates to rise with the Fed standing pat on rates for years yet.
So use these forecasts to help you set out your strategy for 2021 and beyond, and put yourself in better financial shape.