Monthly mortgage payments could surge 22% if US defaults

May 12, 2023

(BLOOMBERG) HIGHER mortgage rates are another potential risk facing the economy if the United States defaults on its debt.

Mortgage rates could soar to 8.4 per cent if the debt ceiling isn’t raised, pushing the mortgage payment on a typical home 22 per cent higher and cooling property sales, according to a report from the real estate firm Zillow. Borrowing US$500,000 at 8.4 per cent would mean a monthly payment of more than US$3,800, compared with about US$3,095 with rates at 6.3 per cent.

A US default threatens to “send the market into a deep freeze”, according to Jeff Tucker, a senior economist at Zillow.

As the Fed tightens monetary policy to fight inflation, mortgage rates have been above 6 per cent for months. That’s cooled the pandemic real estate frenzy, with the higher borrowing costs keeping both buyers and sellers on the sidelines. First-time buyers have had a particularly hard time cracking the market, and another surge in rates would only make it worse, Tucker said.

President Joe Biden and House Speaker Kevin McCarthy so far have failed to reach a deal on raising the ceiling and the US could default on its debt as soon as Jun 1, according to Treasury Secretary Janet Yellen.