Mortgage Costs Surge as Middle East Conflict Fuels Economic Uncertainty
The ripple effects of the escalating conflict in the Middle East are now being keenly felt by Australian homeowners, with the cost of typical mortgages experiencing a significant jump in just a few short weeks. Fears of ‘Trumpflation’ – a concept suggesting potential economic policies that could drive inflation and interest rates higher – are also casting a shadow over the market, suggesting that borrowing costs are unlikely to ease anytime soon.
According to analysis from Moneyfacts, the average two-year fixed mortgage rate has climbed from 4.83 per cent at the commencement of the regional conflict to a sobering 5.35 per cent today. This represents the highest point seen since March 2025, translating to an approximate annual increase of £900 for someone borrowing $250,000 over a 25-year term.
Similarly, the average five-year fixed mortgage rates have not been spared. They have risen from 4.95 per cent at the conflict’s outset to 5.39 per cent currently, marking their highest level since July 2024. This surge adds an estimated $775 per year to the cost of that same $250,000 loan. For context, as recently as January, the most competitive fixed rates on the market were comfortably below 3.5 per cent; now, they are all exceeding the 4 per cent mark.
Energy Prices Skyrocket, Fuelling Inflationary Concerns
A major escalation in the Iran war, which included a retaliatory attack on a gas facility in Qatar, saw overnight gas prices surge to their highest level in three years. This dramatic spike in energy costs is now feeding into broader inflation expectations, with markets anticipating that these higher energy prices will translate into increased inflation later this year.
The price of Brent Crude oil has seen a substantial increase of over 50 per cent in the past month alone, underscoring the global impact of the geopolitical tensions. This shift in the energy market has fundamentally altered the outlook for interest rates and, consequently, mortgage rates.
Shifting Interest Rate Expectations: From Cuts to Hikes
Prior to the Middle East conflict, financial markets were largely pricing in one or two interest rate cuts by the Reserve Bank of Australia (RBA) within the current year. However, the current geopolitical landscape has dramatically reversed this sentiment. Markets are now recalibrating, factoring in the possibility of two to three interest rate hikes in 2026.
While the RBA may have held its benchmark interest rate steady in its most recent decision, this action does not preclude further increases in fixed-rate mortgages in the coming days and weeks. Experts are warning that mortgage rates could continue their upward trajectory in the longer term as well.
Historical Data and Future Projections
An in-depth analysis of Australian monetary policy and historical rate data spanning from 1990 to 2025 suggests that average mortgage rates tend to stabilise at approximately 1.5 percentage points above the official cash rate. With the current cash rate standing at 3.75 per cent, this historical pattern would imply an average mortgage rate of around 5.25 per cent.
However, if the ongoing conflict continues to disrupt the global economy and the cash rate rises to the 4.25 per cent that some markets are predicting, average rates on new mortgages could stabilise closer to 5.75 per cent. This scenario could result in an additional annual cost of $1,000 to $1,500 for borrowers taking out a $250,000 loan over 25 years, compared to what they would have paid at the beginning of the conflict.
Understanding Swap Rates and Their Impact
Adam French, head of consumer finance at Moneyfacts, explained the mechanics behind these rising costs. “Swap rates, which underpin mortgage pricing, have risen sharply following the decision to hold the base rate at 3.75 per cent, with markets interpreting commentary from the Reserve Bank of Australia as leaving the door open to rate rises,” he stated.
He further elaborated, “With two-year and five-year swaps now sitting at their highest level in more than a year, lenders are once again facing higher funding costs, and this will feed through into mortgage pricing. While a quicker resolution to the conflict in the Middle East could ease pressure on rates, the reality is that a more volatile world is a more expensive world. Even though the most competitive deals will remain below average, anyone looking to buy or remortgage this year needs to prepare for higher costs than previously expected.”
Fixed-rate mortgage pricing is intrinsically linked to Sonia swap rates – the inter-bank lending rate, which is a barometer for future interest rate expectations. When Sonia swap rates climb significantly, it typically leads to an increase in fixed mortgage rates, and vice versa.
Swap Rate Movements Reflecting Market Sentiment
Similar to movements in government bond yields, Sonia swap rates have experienced a notable upward spike since the conflict began. As of today, two-year swap rates stand at 4.34 per cent, a considerable jump from 3.36 per cent recorded on 27 February.
In parallel, five-year swap rates have climbed to 4.23 per cent, up from 3.41 per cent on the same date. This means that both two- and five-year swap rates are now nearly 1 percentage point higher than they were at the start of the conflict and have reached their highest point in over a year. Consequently, mortgage rates are highly likely to continue their upward trend to accurately reflect these shifts in market sentiment and funding costs.
