How the war in Ukraine could impact your money and your mortgage

Russia’s invasion of Ukraine has caused a humanitarian crisis, but the war is also impacting economies worldwide, including here in Australia.

The Reserve Bank of Australia governor Phillip Lowe made it clear in a recent address that he and the board are closely watching the impact the conflict is having on the economy.

And it’s fair to say there’s a lot of uncertainty.

Homeowners face higher mortgage costs when interest rates rise. Picture: realestate.com.au

Mr Lowe said it’s difficult to know what the full implications are, but right now Australians will be noticing increases to the cost of living, particularly in food and fuel prices.

With households already paying more at the checkout, many are wondering why the RBA would also move to increase mortgage repayments through a higher cash rate.

Simply put, the RBA’s main goals are to keep inflation sustainably within a target range of 2% to 3% and to keep unemployment low.

“It is only possible to achieve a sustained period of low unemployment if inflation remains low and stable,” Mr Lowe said. “Recent developments in Europe have added to the complexities here.”

“From both a humanitarian and economic perspective, there is a lot riding on how events develop here,” he said.

Sharp rise in the cost of living

Anyone with a car knows first-hand the impact on the cost of fuel which, according to the Australian Institute of Petroleum, had already risen around 15% in the six months before the invasion of Ukraine began.

At the time of writing, the average price of unleaded was $2 in Sydney and $2.11 in Perth. In many regional areas you can expect to pay even more.

Surging oil prices are pushing up the cost of petrol. Picture: Getty.

A rise in the cost of essential commodities, means a rise in inflation.

The RBA says the war will cause headline inflation – known as the Consumer Price Index (CPI) – to be higher than it would have been otherwise, but so far the rise in inflation here is mild compared to the US and Europe.

Headline inflation here is 3.5%, in the US it’s more than double that – and that’s before the Russian invasion of Ukraine is taken into account.

The RBA says the price of gas in Europe has more than doubled since the start of February, oil and thermal coal prices are up by 40%, and base metals like nickel and aluminium are up sharply.

“The prices of agricultural commodities have also been affected, with the price of wheat in global markets up by 40% since the start of February,” said Mr Lowe.

But while the rise in commodity prices will slowdown economic activity in Europe, Mr Lowe says Australia is in a different position.

“We export many of the commodities whose prices are rising,” he said. “This means that our terms of trade will rise over the months ahead, which will provide a boost to our national income.”

“This boost is likely to be evident mainly in the form of higher profits for companies in the resources sector and higher tax revenue.”

But at the same time as this ‘boost’, we’ll be paying those aforementioned higher prices at the bowser, which will eat into household budgets.

And because of that, Mr Lowe expects any extra national income will be saved, not spent.

Does this change when the cash rate will rise?

Over and over again, the RBA has said it will not increase the cash rate until underlying inflation is sustainably in the 2% to 3% target range. Underlying inflation reduces the effects of volatile price swings captured in the headline CPI figure.

“The recent lift in inflation has brought us closer to the point where inflation is sustainably in the target range. So too have recent global developments. But we are not yet at that point,” said Mr Lowe.

The RBA is widely expected to raise interest rates this year. Picture: realestate.com.au

David Plank, ANZ’s head of Australian economics, said Mr Lowe’s speech points to the first rate hike being in the third quarter of the year, although surging inflation could bring that forward.

“A material surge in inflation would challenge this, as it would make it difficult for the RBA to argue that it ‘can be patient in a way that countries with substantially higher rates of inflation cannot’,” Mr Plank said.

PropTrack economist Anne Flaherty said she thinks the RBA will at least wait until it has second quarter inflation data before making a move, and that data isn’t released until July.

“Which would mean an August interest rate rise at the very earliest,” Ms Flaherty said. “It’s hard to know when they’re going to pull the trigger.”

When the cash rate rises mortgage interest rates will follow.

Cost to mortgage holders

When the RBA raises the cash rate, lenders tend to pass on that hike to customers with a variable interest rate home loan. Because of this, AMP estimates a cash rate of between 1.5% to 2% would see variable mortgage rates to also increase by up to 2%.

Of the big four banks, CBA currently leads the pack on when it expects the first rate hike to occur, although anticipates a lower cash rate peak than other major lenders.

ANZ currently predicts the biggest rise in the cash rate, seeing a lift to 2% by the end of 2023, before eventually reaching above 3%, although no specific timeline has been given.

Here’s the big four banks’ current cash rate forecasts

^{Forecasts current at time of publication on 15 March 2022.}

For mortgage holders, that could mean hundreds of extra dollars in repayments per month according to analysis conducted with the Mortgage Choice home loan repayment calculator.

Assuming an average existing variable loan rate of 2.94%, a borrower with $500,000 owing on their mortgage could see their repayments rise by around $550 per month, should their variable rate increase by 2%.

In this calculation, the borrower is an owner occupier paying principal and interest with 25 years remaining on their loan.

Borrowers locking in low rates

Early data analysed by PropTrack is showing the threat of interest rates rising, and an increase in fixed-term interest rates, isn’t doing anything to deter buyers.

“Compared to the same time last year, we’ve actually seen more properties sell over the first two months of 2022,” Ms Flaherty said.

Borrowers are still rushing to lock in a low interest rate. Picture: Getty.

“It’s the highest level of property sales [on record], and part of that is buyers are looking to buy sooner rather than later now that there’s a growing expectation of interest rate rises and they probably want to lock in a fixed rate.”

After hitting record lows in 2021, fixed mortgage rates have been trending higher for several months as lenders prepare for higher funding costs.

The strong selling activity comes despite Westpac’s Consumer Sentiment Survey suggesting confidence in the housing market is ‘deteriorating sharply’, with the ‘time to buy a dwelling’ index down 40.6% from its peak in November 2020.

However, Westpac chief economist Bill Evans said most consumers still expect property prices to rise.

“From our perspective, it is surprising that we have not seen a sharper fall in the House Price Expectations Index to date,” he said, noting official rate hikes are yet to be fully factored into consumers’ house price views.

Investor activity up and up

Finally, there’s a chance the war in Ukraine could also influence buying decisions this year, according to PropTrack’s Anne Flaherty.

Investor activity has further to run as money is redirected into property. Picture: realestate.com.au

Despite an inevitable rise in interest rates at some point, she says the war could have the result of actually increasing the number of people looking to invest in property, with stock markets becoming increasingly volatile.

“I think that those investors who may have otherwise favoured stocks may now start thinking more about the property market and thinking the property market’s a bit more stable,” Ms Flaherty said.

“Australia’s a very safe, transparent market, so it could also increase offshore buyers looking to invest in the Australian economy.”