Could super early release be used to pay the mortgage?

Two COVID-19 crisis measures could collide in a fairly dramatic fashion soon, with banks potentially asking borrowers to consider withdrawing their superannuation to meet mortgage payments.

While ham-fisted attempts by real estate agents, private schools and others to “convince’’ people to access their super so they can pay their bills have attracted more ridicule and official warnings than actual cash, the pleas of banks are likely to be much more successful.

The banking regulator, the Australian Prudential Regulation Authority (APRA) has already revealed that some Australian banks plan on asking their customers to consider withdrawing their superannuation early so that they can begin to make repayments on their frozen loans, although they will need to do so very carefully.

Banks can ask the question

It is certainly an option that will be explored, given that one in every ten Australian mortgages are frozen with repayments stopped as a COVID-19 hardship strategy but those loans now need to begin to thaw, one way or another.

With $160 billion or 9% of mortgages still on hold and banks trying hard to contact customers to get repayments started, there could be some awkward discussions around whether tapping super accounts for $10,000 could be part of a repayment strategy.

“ASIC notes that some plans included reference to borrowers accessing their superannuation as an option that could potentially be considered if borrowers are unable to resume repayments,” Therese McCarthy-Hockey, executive director of APRA’s banking division, wrote in a letter to lenders.

Banks need to be very careful here that they are not giving unlicensed or inappropriate investment advice but there is no doubt that some customers won’t need too much encouraging if there is a relatively painless – if potentially inadvisable – way to keep a roof over their head.

In the advice to banks, APRA warned that banks “should have appropriate controls in place to ensure that if they are informing borrowers about their ability to access superannuation, they are not providing unlicensed financial product advice.”

That could be achieved by strongly recommending that borrowers seek out professional advice.

APRA worried about the unfreezing of loans

As the banking regulator, APRA is obviously very concerned with the successful thawing of the frozen loans, as are the banks, but it is an issue that requires a lot of care.

Customers who can’t begin repayments again face either deferring the issue until January, restructuring their loan possibly to interest only, entering hardship provisions, or even defaulting on the loan or selling under an arrangement with the bank.

ATO set to take action against unauthorised early release

Another complication with accessing super under the early release program is that the Australian Tax Office has begun to crack down on people accessing their super without meeting the access criteria.

While the ATO has been administering the scheme, applicants did not need to show evidence of financial hardship before they got the payments – which could be up to $10,000 last financial year and another $10,000 in 2020-21.

The ATO has the ability to data-match an applicant’s income to check if they meet required conditions to access their super and has said it will act against those who exploit the early super release scheme.

However, it has also said that it does not intend to apply penalties in circumstances of genuine mistakes or misunderstandings.

No fines handed out – yet

Although no fines have yet been issued, applicants that knowingly made a false or misleading statement to access the scheme could be fined, with withdrawals also treated as assessable income, on which tax would have to be paid.

To be eligible under the financial hardship scheme, super fund members must have been made redundant after December 31, have experienced a 20% drop in hours or turnover for sole traders or to have become eligible for welfare assistance, such as JobSeeker, Youth Allowance or Parenting Payment.

That is highly likely to be the case for any bank customers who are still unable to restart payments on their home loans, which is why the withdrawal option could be part of the conversation.

Surveys of super members who have accessed superannuation have showed that many have done so without fully meeting one of the key early release qualifying conditions.

A study by the ARC Centre of Excellence in Population Ageing Research found that 4.9% of CBUS super fund members self-reported that they were “employed – hours same or increased” when asked why they were accessing their super early.

APRA figures show that $34 billion has been withdrawn by about 3 million super fund members so far under the early release scheme.