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A year ago, the world’s most powerful central bankers told consumers and investors inflation would settle down closer to their 2 percent target and they’d lift rates to barely 1 percent. What ended up ensuing was an economic environment few have ever seen and virtually no one predicted — and this year, consumers will be living in its aftermath.
The cost of buying a car, tapping into your home’s equity and financing your purchases with a credit card aren’t expected to jump this year as much as last year, according to Bankrate’s 2023 interest rate forecast. Yet, they’re all projected to climb even further and hold at historically high levels, as the Federal Reserve stays the course with its most aggressive inflation fight in 40 years.
Only one key consumer lending product — the 30-year fixed-rate mortgage — is projected to fall in the year ahead, though that might be for more bad reasons than good. Fears of a possible recession are far and wide this year, and a slowing economy will weigh on the key rate that influences mortgages even more than the Fed: the 10-year Treasury yield.
Fed officials don’t care about preventing a recession as much as overcoming inflation. Bankrate sees the U.S. central bank lifting rates to 5.25-5.5 percent, a quarter-point higher than the Fed’s current forecasts.
The silver lining to an aggressive Fed, higher rates act as a lever on savings yields. Banks’ offerings are expected to climb even higher this year as U.S. central bankers continue raising rates, though that also means they’ll peak when the Fed’s rate does, too. Better payouts, however, are still to be found if consumers shop around, steps that are even more important in an economic environment plagued by high inflation and rising recession risks. The first half of the year could feel much different than what follows.
“Inflation will come down, but it’s going to come down slowly. It’s going to force the Fed to go a little bit higher than they currently think they will, and they’ll do so in the face of what I expect to be a weaker — potentially recessionary — economy in 2023. But as inflation pressures ease and the economy slumps, the Fed will move to the sidelines by the second quarter.”
— Greg McBride, CFABankrate chief financial analyst
Rate forecasts from Bankrate’s Greg McBride, CFA
- Federal funds rate: 5.25-5.50% (Currently: 4.25-4.5%)
- 10-year Treasury yield: 3% (Currently: 3.88%)
- 30-year fixed-rate mortgage: 5.25% (Currently: 6.74%)
- Home equity line of credit (HELOC): 8.25% (Currently: 7.62%)
- Home equity loan: 8.75% (Currently: 7.75%)
- Money market account: 0.34% (Currently 0.25%)
- One-year CD: 1.8% for national average, 5% for top-yielding (Currently: 1.38% and 4.86%, respectively)
- Five-year CD: 1.5% for national average, 4.1% for top-yielding (Currently: 1.15% and 4.6%, respectively)
- Savings account: 0.29% for national average, 5.25% for top-yielding (Currently: 0.2% and 4.16%, respectively)
- Five-year new car loan: 6.90% (Currently: 6.13%)
- Four-year used car loan: 7.75% (Currently: 6.77%)
- Credit card: 20.5% (Currently: 19.60%)
Cooling inflation and a slowing economy could weigh on mortgage rates, but pandemic-era deals will still be nonexistent
- 30-year fixed-rate mortgage: 5.25%
In the first three quarters of 2022, mortgage rates only headed in one direction: up. The key home-buying rate hit a 20-year high of 7.12 percent on Oct. 26, up nearly 4 percentage points since the start of the year, according to Bankrate data. Eventually, however, mortgage rates changed course, closing out the year at 6.74 percent.
Their volatile journey is because of two factors: inflation and the 10-year Treasury yield, which lenders use as the benchmark for mortgage rates. Investors’ inflation expectations often guide those bond yields more than anything else — including the Fed.
Falling inflation and a likely slumping economy cause mortgage rates to fall. Yet, a hawkish Fed and out-of-control inflation push up yields and mortgage rates.
McBride sees inflation moderating in the second half of the year, with the 10-year Treasury yield falling 88 basis points to 3 percent as investors brace for a downturn. It’s why he’s penciling in a 30-year mortgage rate of 5.25 percent by the end of 2023 — 1.49 percentage points lower than where it stands currently.
“With the Fed maintaining an aggressive posture and inflation still high, mortgage rates will roller coaster up and down during the first half of the year before a more substantive slide takes hold in the back half of 2023,” McBride says. “We’ll likely see a notable pullback as the economy weakens and inflation trends lower.”
Still, consumers who locked in their new mortgage or refinanced when rates were at record lows in 2021 are probably thanking themselves now. A dip is unlikely to take mortgages back to pandemic-era lows.
Meanwhile, ongoing supply challenges will likely keep home prices elevated. Even as higher rates weigh on home-buying activity, the median sales price of a home hit a record high of $454,900 in the third quarter of 2022, according to the Census Bureau.
“Mortgage rates will drop, but not enough to ignite refinancing activity, not enough to cure buyer affordability concerns, and in a weakening economy, homebuying demand will remain depressed – as will supply,” McBride says. “Nobody is looking to buy a house when the economy is really weak. Even if mortgage rates drop, it’s not exactly going to lure home buyers off the sidelines.”
For more details, read Bankrate’s mortgage rate forecast.
Rate hikes will lift home equity loan rates
- HELOC: 8.25%
- Home equity loan: 8.75%
Homeowners are sitting on a record amount of home equity, but they’ll have to pay even more this year to tap into it. Home equity loans and HELOCs are directly pegged to the prime rate, which typically holds 3 percentage points above the Fed’s key rate. In other words, the higher the Fed’s rate climbs this year, the more home equity loan rates will soar as well.
McBride’s forecast shows the average HELOC rate climbing to 8.25 percent by the end of 2023, about 63 basis points higher than where it settled at the end of 2022.
“The important takeaway for current HELOC borrowers is that another 1 percentage point in rate hikes by the Fed means your rate will move up by 1 percentage point,” McBride says. “The average rate available to new borrowers will rise less than that due to various introductory offers.”
The average home equity loan rate is projected to hit two-decade highs in the second half of the year, McBride adds, rising a full percentage point from its current level to 8.75 percent.
Existing borrowers, however, will only be impacted if they have a variable-rate loan. Borrowing costs on home equity loans, for example, are fixed, meaning their interest rate lasts for the life of the loan. Yet, fewer lenders offer them, McBride says. Variable-rate HELOCs are the most common way homeowners borrow from their home’s equity.
For more details, read Bankrate’s home equity interest rate forecast.
Savers will find the best deals in over a decade if they shop around
- Money market account: 0.34%
- One-year CD: 1.8% for national average, 5% for top-yielding
- Five-year CD: 1.5% for national average, 4.1% for top-yielding
- Savings account: 0.29% for national average, 5.25% for top-yielding
Savers who thought 2022 was the best year yet are going to cheer what’s to come: Rising yields have not yet peaked, McBride says. And even better news, moderating inflation means the money you have sitting on the sidelines won’t lose as much purchasing power as it likely did in 2021.
“You may be earning a rate comparable to the rate of inflation by the end of 2023,” McBride says. “That itself would be a big improvement.”
McBride projects yields will rise at both the big banks and nontraditional, online institutions — though consumers will see the biggest bang for their buck if they park their cash with the latter.
A one-year certificate of deposit (CD) should average 1.8 percent nationally in 2023, the highest since 2008, while a five-year CD should average 1.5 percent, the highest since 2019, according to McBride’s forecast. Yet, their top-yielding counterparts are expected to hit 5 percent and 4.1 percent, respectively.
Other popular products — money market and savings accounts — should average 0.34 percent and 0.29 percent, respectively, across the nation by the end of the year. But the top-yielding savings account will offer a 5.25 percent yield, the highest since 2008. The nation’s biggest banks are still swimming in a pool of deposits, meaning they don’t have to lift yields as much to entice more consumers to deposit their funds.
“Put your cash where it will be welcomed with open arms and higher returns,” McBride says.
Yields will hit a ceiling when the Fed stops hiking rates, likely leading some consumers to consider locking up their cash in a CD for a higher return. Shorter-term CDs are projected to offer better payouts than longer-term ones because the Fed is expected to lower rates once inflation falls. In other words, rates won’t be this high forever. But with rising recession risks and a volatile year ahead, be sure not to sacrifice liquidity for a higher yield.
“The fundamental point is, ‘When do you need the cash?’” McBride says. “For the vast majority of households, that’s where the focus needs to be: beefing up your emergency savings.”
Auto loan rates will keep rising with each rate hike
- Five-year new car loan: 6.9%
- Four-year used car loan: 7.75%
An active Fed similarly means rising auto loan rates. McBride sees the average interest rates on a five-year new car loan reaching 6.9 percent by the end of the year, up 77 basis points from its current level. Meanwhile, the average rate for a four-year used car loan will be 7.75 percent, a 98-basis-points jump from the end of 2022.
Yet, how competitive of a rate you’re offered depends on your credit history. Financial institutions also often tighten lending standards in a weakening economy.
“Consumers with weaker credit profiles will have a much different experience as credit tightens and rates reach well into double digits,” McBride says.
But what impacts your car payments even more than its interest rate is the car’s price tag. Used and new vehicle prices have soared since the pandemic. Consumers flush with cash from stimulus-related savings have flocked to dealerships just as manufacturing snags ranging from roiled global supply chains to chip shortages have suppressed supply.
Used car prices in November 2022 fell 3.3 percent from a year ago, a marked improvement after soaring as high as 45 percent between June 2021 and June 2022, according to the Labor Department’s consumer price index (CPI). Yet, new vehicles cost about 7.2 percent more than a year ago.
“Interest rates are not the reason people are walking around with $700-a-month car payments,” McBride says. “The reason is, the sticker price and the amount you’re borrowing. If you’re borrowing $45,000, that’s a $600- to $700-a-month payment, even with the lowest of interest rates.”
For more, read Bankrate’s auto loan rates forecast.
Credit card rates will break new records
- Credit card: 20.5%
It has never been cheap to finance a purchase with a credit card, but borrowers who did were likely met with extra sticker shock last year: Credit card rates reached a record high of 19 percent on Nov. 9 and have climbed higher since.
Bankrate’s forecast shows those rates continuing to break records. The average credit card rate will rise to 20.5 percent by the end of 2023, up 90 basis points from a year ago, according to McBride’s forecast.
Similar to a HELOC, credit card rates also follow the prime rate and will rise within one to two statement cycles of any rate move. The average rate available to new cardholders will rise less than amid introductory offers and retiring older cards, McBride says.
As always, cardholders won’t be affected by higher rates if they pay off their balance each month. If you do carry a balance, however, the impact of those rate hikes can be deceiving. Higher rates won’t influence the minimum payment on your card.
“Where it’s hard to notice the impact of rate hikes in the monthly payment on a credit card, you’ll certainly notice it in terms of interest charges and the time it takes to pay that balance off,” McBride says. “Pay down credit card debt aggressively, turbocharge those efforts with a 0-percent balance transfer offer and refrain from putting additional purchases on credit cards unless you can pay the balance in full at month-end.”
For more details, read Bankrate’s credit card forecast.