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  • 2 days ago
Will Mortgage rates go down, remain the same or go up in 2025?

Despite the US Federal Reserve cutting rates, 30-year fixed mortgage rates have gone up in January 2025 instead of down! What’s going on?

In this video, we look at the key reasons driving mortgage rates higher including 10-Year Treasury Bond Yields, the Spread and Mortgage-backed securities. We also cover the outlook for US Mortgage rates and what to expect for the rest of 2025.

#mortgage #mortgagerates #homeownership #home #property #flat #firstimebuyer #movinghome #buyingahome
Transcript
00:00At the end of 2024, the U.S. Federal Reserve lowered the federal funds rate to a range of 4.25%
00:06to 4.5%. The Fed has now reduced rates by one percentage point since September 2024,
00:13which was welcome news for home buyers and first-time buyers, hoping this would be a
00:17continued trend in 2025 and that mortgage costs would reduce. But the confusing thing is that
00:23mortgage rates have actually gone up instead of down. Why? In this video, I'll cover the key
00:29reasons why mortgage rates are going up right now, and I'll touch on the outlook for the rest of 2025.
00:36If you're new to this channel, I'm Matt. I've been a finance consultant for over 10 years.
00:40I now run my own company, and on this channel, I talk all things personal finance.
00:45So let's start with what influences mortgage rates. The first concept to understand is U.S.
00:50Treasury bond yields. Mortgage rates are largely influenced by these bonds rather than Federal
00:56Reserve rates. Treasury bond yields is the interest rate that the U.S. government pays to borrow money
01:02for 10 years, and what is happening to Treasury bonds matters because it influences borrowing costs.
01:08Treasury yields often reflect what investors in the financial markets anticipate for economic growth,
01:14inflation, and monetary policy. As you can see from this graph, the average 30-year fixed mortgage
01:19rate and the 10-year Treasury bond yield move closely in sync. When the bond yield increases,
01:25mortgage rates usually go up as well, and over the last three years, we've seen an upward trend in
01:31both. So while the Federal Reserve cut rates in 2024, Treasury bond yields have gone up to almost 5%,
01:38and this is the highest they've been since just before the financial crisis in 2008. This is bad
01:44news for the U.S. government, as it means they must pay more to service their debts, and it's also bad
01:49news for borrowers, including mortgage holders, as mortgage interest rates greatly depend on which
01:54way bond yields are moving. For example, in December 2024, the 30-year fixed mortgage rate jumped to
02:006.72% compared to 6.6% just a week earlier. The rise was tied to changes in the bond market driven by
02:09higher inflation expectations and growing uncertainty in the economy. There are several factors that have
02:15contributed to the recent volatility that we've seen in the bond market. The first is that there have been
02:20concerns about inflation and government economic policies. The U.S. annual inflation rate is
02:25currently at 2.7%. Although it's moving in the right direction, it's still above the Federal Reserve's
02:31target of 2%, and many investors worry that it will be difficult to bring it fully under control.
02:37There's also uncertainty about the new Trump administration and what government policies
02:41could be introduced, such as policies to boost economic growth and tariffs, which could push the
02:47inflation rate further upwards and lead to higher interest rates. At the same time, rising U.S.
02:52federal debts and growing budget deficits has made investors increasingly cautious, which has put
02:58upward pressure on bond yields. The second point is that bond yields rise to attract investors.
03:04Treasury bonds are seen as a safe investment as they're guaranteed by the U.S. government,
03:09but investors tend to turn to higher return investment opportunities, such as stocks and shares,
03:14when the financial markets are growing. The return on the S&P 500 stock market index was around 24%
03:21in 2023. During that time, the average yield on a 10-year treasury bond was less than 4%.
03:28It doesn't take an expert investor to work out which gave you a better return for your money.
03:33As demand declines for 10-year treasury bonds, the bond yield rates rise to attract investors.
03:39And the third point is the uncertainty about the Federal Reserve's next steps. The Federal Reserve
03:45chair, Jerome Powell, recently stated that there will likely be fewer interest rate cuts than expected
03:51in 2025, and this statement unsettled the financial markets and contributed to the rise in bond yields.
03:58It's helpful to understand what drives bond yields, as new mortgage rates change all the time,
04:03but they're roughly in line with the 10-year treasury bond yield.
04:06The second concept to understand that influences mortgage rates is something called the spread.
04:12Mortgage rates are determined by adding a spread, which is an additional fee on top of the 10-year
04:17treasury bond yield. The additional fee is historically around 1.5% to 2% to compensate for
04:24the higher risk of mortgages and loaning money to customers that could default or struggle to make
04:29repayments. So if the bond yield is 5%, mortgage rates could be 6.5%, 7% once you've added the additional
04:36fee. The additional fee started to increase when the Federal Reserve put in place measures to tighten
04:41the economy. And as a result, people taking on new mortgages are paying more, whether that be an
04:47existing mortgage holder who is refinancing their loan or a potential home buyer trying to get on
04:52the property ladder to buy their first home. The spread or additional fee did come down a bit in
04:572024, but still remains far above pre-COVID pandemic levels. If the spread went back to normal levels,
05:04then we may also see mortgage rates come down a bit too. The third concept to understand which can
05:10also influence mortgage rates is mortgage-backed securities. Most lenders don't keep the loans they
05:16fund. Instead, they package them into mortgage-backed securities and sell them to investors. When
05:21mortgage-backed security prices are low, mortgage rates are high and vice versa. The US Federal Reserve,
05:28particularly through the COVID pandemic, bought mortgage-backed securities as part of its
05:32measures to support the economy, keeping mortgage rates for home buyers lower and cheaper to finance.
05:38This measure by the Federal Reserve inflated demand for mortgage-backed securities. However,
05:44as you can see from this graph, over the last couple of years, the Federal Reserve has been reducing the
05:49amount of mortgage-backed securities that they have. And this had a downward trend on their price
05:54and therefore an upward trend on mortgage rates. So what is the outlook for mortgage rates in 2025?
06:00Well, unfortunately for home buyers, mortgage rates probably won't drop enough to substantially
06:06improve affordability. Many forecasters predict that mortgage rates will hover around the 6% range
06:12this year. If you're thinking about buying a home, it's generally better to think about how home
06:17ownership fits into your lifestyle and finances, rather than trying to time the market to get the
06:22best mortgage rate. With mortgage rates looking like they'll be remaining relatively high in the
06:27short term, the decision on whether to rent or to buy or whether to pay off your mortgage early or
06:32to invest becomes increasingly important. I've done videos to deep dive on these topics. So if you want
06:38to understand more, I'll leave links to the videos down below. I hope this video has been helpful in
06:44clearing up some of the confusion about why mortgage rates aren't falling following the Federal Reserve rate
06:49cuts. Feel free to leave any questions in the comments, give the video a like and subscribe to my channel.
06:54I'll see you on the next video.

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