A deficit-financed reconciliation bill would raise Americans’ mortgage costs by thousands of dollars per year by pushing up interest rates. The House-passed One Big Beautiful Bill Act (OBBBA) would add about $5 trillion to the debt over ten years if its provisions are made permanent, while the Fiscal Year (FY) 2025 concurrent budget resolution allows the Senate to take that bill and enact up to $5.8 trillion of primary borrowing through 2034. Not only would this borrowing eventually shrink the economy and potentially reduce after tax income, it would also push up interest rates on mortgages, auto loans, and business loans.
We estimate that a bill that adds $5.8 trillion to primary deficits would raise the debt-to-Gross-Domestic-Product (GDP) ratio by 17 percentage points by 2034 and approximately 63 percentage points by 2055 and, as a result:
- Raise interest rates by 34 basis points (0.34 percentage points) on consumer debt, including mortgage loans, student loans, and other forms of debt by 2034.
- Raise those interest rates by 126 basis points (1.26 percentage points) by 2055.
- Boost the average annual mortgage payment by $1,450 by 2034 and the equivalent of $5,500 by 2055, which compares to an average tax cut of $1,550 from a bill resembling the Senate budget reconciliation instructions in 2034 and $2,450 per person in 2055.
- Boost the lifetime cost of the average mortgage by $44,000 in 2034 and the equivalent of $250,000 in 2055, adding 3 to 13 percent to the cost of a typical mortgage.
Higher Debt Means Costlier Mortgages
When government debt increases, the cost that bondholders charge the government to hold the debt (the interest rate) increases as well, as we have seen in the bond market recently. Interest rates on government debt flow through to interest rates throughout the economy.
The Congressional Budget Office (CBO) estimates that every one percentage point increase in the government’s debt-to-GDP ratio boosts interest rates by 2 basis points (0.02 percentage points). Some estimates are even higher – scholars at the Federal Reserve Bank of Dallas find each percentage point increase in debt-to-GDP boosts interest rates by 3 basis points (0.03 percentage points) and scholars at the American Enterprise Institute (AEI) find each percent of GDP in debt boosts rates by 4.5 basis points (0.045 percentage points).
Increasing primary borrowing by $5.8 trillion through 2034, as allowed under the Senate reconciliation instructions, would boost debt by 17 percent of GDP once interest is included, up to 134 percent of GDP by 2034. A CBO illustration of an extrapolated version of the Senate instructions would boost debt by 63 percent of GDP by 2055 to 220 percent.
Based on CBO’s interest rate rule-of-thumb, this suggests an interest rate increase of 34 basis points (0.34 percentage points) by 2034 and 126 basis points (1.26 percentage points) by 2055. We’ve already shown how this can affect federal interest spending – but it would also boost consumer interest rates. These rates tend to closely track interest rates on ten-year Treasury securities, either by law in the case of student debt or by market fundamentals for mortgage rates, as we have seen in recent weeks.
The average new mortgage is currently approximately $450,000, and in 2034 will be approximately $530,000 in current dollars, because housing historically appreciates in value faster than overall inflation. An extra 34 basis points of interest would increase the average new mortgage payment by over $1,450 per year, or almost $44,000 extra over the life of the loan. An extra 126 basis points would increase yearly payments on a $530,000 home by $5,500, or $165,000 over the life of the loan.
The 2034 figure is nearly as much as the average tax cut per person ($1,550) that taxpayers can expect to receive in 2034. The average tax cut per person in 2055 from a bill resembling the Senate reconciliation instructions is $2,450, per our extrapolation from CBO’s estimate of the tax cuts in 2055. The increase in mortgage costs that year would be $5,500 for a $530,000 home, $7,800 on a $750,000 home, and $10,400 on a $1 million home, several times the average tax cuts in a potential bill.
This increase in mortgage rates would have an outsized effect in some parts of the country. For example, in Western states – those from the Rocky Mountains to the Pacific Ocean – the average home sale is currently $630,000 and is projected to be approximately $750,000 in 2034 in constant dollars. A deficit increase of 17 points of debt-to-GDP would cause mortgage payments on a $750,000 home to rise by $2,050 per year in 2034, which significantly exceeds the tax cut most Americans can expect to receive.
Under the Senate reconciliation instructions, mortgages issued in 2034 could be 3.5 percent more expensive over their lifetime. For instance, a $1 million home will experience an extra $83,000 in added interest costs and a $530,000 home would experience $44,000 in added costs. This would rise to 13 percent more expensive in 2055, when the million-dollar house would cost $312,000 more over its lifetime and the $530,000 home would cost $165,000 more.
Actual Effects Could Be Higher Or Lower
Borrowing up to Senate instructions would boost interest rates by 34 basis points this decade and 126 basis points in 2055. But abiding by the House’s headline reconciliation deficit number – which incurs about $2.4 trillion of primary deficits instead of $5.8 trillion – and swearing off the budget gimmicks and fiscal cliffs currently in the bill would have a somewhat smaller effect. Under the House reconciliation instructions, debt-to-GDP would rise by 7 points by 2034, boosting interest rates by 14 basis points. In this case, mortgage costs would rise by $600 yearly on the average home or $18,000 over the life of a mortgage. Likewise, mortgage costs on a $750,000 home would rise by $850 or $25,500 over the life of the loan by 2034.
On the flip side, interest rate effects could be larger than CBO estimates. AEI scholars estimate that each point of debt-to-GDP raises interest rates by 4.5 basis points (0.045 percentage points). If so, enacting the Senate’s $5.8 trillion of borrowing would raise rates by 76.5 basis points (0.765 percentage points) by 2034 – or likely somewhat more once dynamic feedback is considered. The average 2034 mortgage payment for a $530,000 home would rise by $3,300 yearly or nearly $100,000 over the life of the mortgage. On a $750,000 mortgage, payments would rise by $4,700 or over $140,000 over the life of the loan and payments would rise by $6,250 on a $1 million mortgage or $188,000 over the life of the loan.
Additional Borrowing Would Increase Other Consumer Costs, Lower Incomes
Other forms of household credit payments, though not as large in size as mortgage debt, would also rise. Mortgage costs are the largest debt item for households, representing 73 percent of all household debt. According to the most recent Survey of Consumer Finances, four-in-ten households have mortgage debt, a third of families have auto loans, a fifth have student debt, and about half have some form of installment loan or credit card debt. Many have a mix of these forms of debt. Though we do not model them here, rising interest rates would make all these debts more expensive, as others have noted, potentially raising costs for families by hundreds of dollars more per year, further exacerbating the cost burdens outlined here.
Enacting a reconciliation package consistent with either the House bill or the Senate instructions would have large and varied effects on the economy. The economy would likely grow in the short run, but such a package could begin subtracting from growth in 2028 and overall shrink the economy in 2034 and beyond. As we have noted, this is because the negative economic effects of debt, such as its effect on interest rates, would overwhelm and counteract positive effects of tax cuts.
Lawmakers can reduce the borrowing of the reconciliation package by increasing the bill’s savings to offset its total price tag using the menu of budget offsets available to them. Offsetting the deficit impact of tax cuts would eliminate their effect on government debt, interest costs, and consumer interest rates. We have written extensively about how a debt-financed reconciliation package could explode government interest costs, which are already at record levels.
