More Aussies tap super to pay-off mortgages

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By Leith van Onselen

The Department of Human Services (DHS) has released its 2013-14 Annual Report, which revealed that the number of Australians seeking to access their superannuation early jumped 7% over the financial year to 19,286, which was the highest level since the Global Financial Crisis (see next table).

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The Early Release of Superannuation Benefits program allows eligible people to draw on their superannuation benefits under specified compassionate grounds in a time of need.

As shown above, around three in five applications to release super early were approved by the DHS, totaling nearly $151 million and averaging $12,874 per successful applicant.

According to News Limited, which reported on the release over the weekend, much of the growth in applications to access super early went to paying-off mortgages.

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Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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Comments

  1. Then use the additional equity to get loan to buy investment property for SMSF.

    Or something. Is that how it works in Australia?

  2. Mr SquiggleMEMBER

    Interesting stat, applications received up 7%, but the number of approved releases was only up 1.9%.

    Sounds like only 1 in 3 applications are getting approved.

    Trustees can’t approve ambit claims, the reason for early release needs to be genuine, or the Fund’s compliance status gets called into question.

    Having mortgage stress won’t be an acceptable reason for early release to many trustees

  3. Pales into insignificance compared to the retirees who are using their super to pay off their mortgages or buy IPs.

    • innocent bystander

      huh?
      this includes them.
      and they are reducing their super by the handsome sum of, on average, $12k

      of course, they could leave it in there and draw down at 4%p.a. – say $10p.w.

      I am just surprised the avg amount wasn’t a lot higher.

      EDIT: my bad, I see now you said retirees rather than early access. Yes it would be interesting to see stats on that, I suspect a lot of the lump sum withdrawals might too low to generate a retirement income tho, and they wish to retire some debt. Sensible? What isn’t sensible is the run up of debt via equity maate to start with.

  4. ceteris paribus

    I don’t know for sure but I think most commentators have got things wrong here.

    If a person/family has a house and the only way they can stop foreclosure is by access to some of their super, in many cases release of their money is the logical and proper thing to do. It is prudent financial strategy and the Government does not authorise release of super money without very good reasons.

    Perhaps people are confusing this debt management strategy with the rort of people taking their super at preservation age and buying a two million dollar mansion as PPOR to become eligible for a full pension – essentially double-dipping with regard to lifelong super tax exemptions plus a full pension.

    • Aussie overpays for house or draws down too much equity mate.
      Aussie can’t pay for house anymore because shock horror circumstances actually change from the finely nuanced bullsh*t that let them loan so much in the first place
      Aussie hits up super.

      What’s not to understand?

    • +1 Agree cp,

      Think financial/employment/relationship stress is a valid reason for release of funds to cover a short term cyclical problem. As a cynic I also think that banks are completely aware of this.

      Do wonder if banks or mortgage providers consider the size of peoples superannuation accounts as a short term buffer when making loan assessments – knowing they can fall back on it as a piggy-bank.

    • migtronixMEMBER

      Okay and what happens next time you can’t make mortgage payments and have already blown all your super?

      • Ah… so when a short term cyclical bind metastasis into a structural clusterf#k?

        Then the bank takes your home away. Home-slave to homeless. Its as liberating as Liberia. 😀

      • The important thing is that the bank is able to liberate you of the burden of having to deal with all that money you have.

        On the upside when the bank reposes your home for sale, they are legally obliged to seek market value and not have a fire sale.

        Of course if the market value has dropped well then, tough.

      • What happens when house prices and fall and all those 100% LVR loans are suddenly up at around 110-120% LVR and the bank (GABBO IS COMING) require a top up to meet maximum LVR ?

        “Yes hello is this the Super of the Future ? Is that you Bernie ? I need $50k from my super because my house is now worth 20% less”

        Yeah – gunna go down real well this one.

  5. This is a good article but I think the main point has been missed. The majority of people that use their super to pay off debts (not captured in the tables) are those who have reached their preservation age either through a transition to retirement strategy or by declaring they have retired. This is extremely powerful if you make large tax deductible contributions and then draw the money out tax free (after age 60) and use the money to pay down debt. Essentially baby boomers can get a tax deduction to pay off non-deductible debts.

    For someone to meet a condition of release under the grounds of financial hardship is quite difficult to do. If they are below their preservation age they must be on Commonwealth income support payments for a continuous period of at least 26 weeks and must be unable to reasonably meet their immediate family living expenses. Presumably if you have been on Newstart for 6 months the bank would have foreclosed on you anyhow. If they are successful in meeting this test, they can only draw between $1,000 and $10,000 from their super. Again, if you’re in a big financial pickle involving debts, this is hardly going to help at that point in time.

    • migtronixMEMBER

      That’s what I thought, it was an end-of-term roll-over w/ tax benes thrown in. Didn’t think they’d let you get your money sooner. Cheers.

    • innocent bystander

      “This is extremely powerful if you make large tax deductible contributions and then draw the money out tax free (after age 60) and use the money to pay down debt. Essentially baby boomers can get a tax deduction to pay off non-deductible debts”

      yes.
      the dots just joined for me on one thing here. outside my personal experience so hadn’t really thought about it but…

      all those interest only loans? cause interest rates are low there is now a big difference between the original repayment (when rates were higher) and some principal was being repaid and the IO amount – it goes into super as salary sacrifice to be drawn down later to pay out the mortgage. someone ran some sums past me and it is quite a windfall in tax savings depending on your salary, marginal tax rate, outstanding mortgage, years til retirement.

      tax minimisation – a great ozzie past time.

      • innocent bystander

        @aj
        no, this is just tax minimisation.
        of course Iam sure they are assuming CG as well, but the sums stack up regardless. unless of course the capital inside super gets creamed. but I am talking vanilla salary earner with a mortgage on PPOR and retail/industry super, not SMSF. I will have to try and find some time and do an example with $’s.

      • innocent bystander

        @aj
        a mate sent me this example:

        Salary: $100,000 pa.
        Mortgage outstanding: $120,000
        Interest rate: 5%
        Mortgage repayments: $21,050 pa – principal and interest (original mortgage $300k 15 years ago)

        Mortgage repayments interest only: $6000 pa.
        Difference: $15,050 pa, after tax.

        Before tax, had to earn $24,672 to get $15,050.

        Salary sacrifice $24,672 into super, taxed at 15% (rather than 39%), tax is $3700.80, leaving $20,971.20 in the super fund.

        Tax saving: $5921pa – the difference between marginal tax rate of 39% and the super contributions tax of 15%.

        After 10 years assuming investment returns of 7% super fund now has nearly an extra $300,000.

        Retires at 60 draws the $120,000 to repay the outstanding home mortgage. Has an extra $180,000 in super.

      • Absolutely, it doesn’t have to be IP’s. remember when the contribution amount was 50K. Guys were whacking in the 50 (arbitrage tax of about 30%!) and taking it out almost immediately.

        But, you know, it was fair because the poor dears didn’t have time to save for retirement their whole lives – they only had cheap housing and free education.

        Haha. Saul is right, it is amazing the younger generations are not out there with pitch-forks.

    • @budreika

      You are confusing early release due to financial hardship with early release on compassionate grounds. Early release on compassionate grounds, as referred to in the chart in the article, does not require the applicant to be in receipt of commonwealth income support – though the applicant does need to show proof that their bank is planning to foreclose on their mortgage.

  6. Ok team, here is the plan, let’s all move up to QLD. I heard Woodridge, Logan Central and Loganlea are all choice estates with a real bargain, lol… and leave the Chinese and other foreigners to squander as much in buying up Syd and Melb with over inflated price, when the next GFC arrive we can move back to buy them off cheap.