• Anitra Nelson, Tony Dalton, Mike Berry

11 December 2009Allowing borrowers to draw on their super to pay the mortgage is bad policy, write Anitra Nelson, Tony Dalton and Mike Berry

THE AUSTRALIAN Prudential Regulation Authority (APRA) has very strict criteria for allowing inividuals to gain early access to a portion of their superannuation. The amount and number of successful requests has increased over the last six years, alongside higher interest rates for households, and financial commentators have speculated that the main reason was a rise in requests from people having trouble covering their home mortgages. A freedom of information request we made recently as part of a project looking at mortgage defaults in Australia, funded by the Australian Housing and Urban Research Institute, reveals that they were right.

During 2003–04, 4019 successful mortgage assistance claims already accounted for almost half of all claims for early access to super – over $26 million of a total of $55.5 million. Over the past five years, from 2004–05 through to 2008–09, with the overal number of claims growing significantly, the 35,000 successful mortgage assistance claims accounted for over half the total ($372.2 million of $673.7 million). Given that a proportion of two of APRA’s other categories involve mortgage assistance too, the real drain is greater. 

But surely avoiding repossession is a legitimate use of super funds? If mortgagors default on their home loans – and they need their lender to provide that evidence – they can claim for early release of super funds to avoid losing their homes through repossession. But many financial counsellors are concerned that such payouts often simply delay and deepen the financial burden of severely distressed borrowers, while severely reducing their future retirement incomes. Many borrowers are so overcommitted that they still lose their homes, and face having lost super funds in the process. Thus it is lenders who end up pocketing borrowers’ super.

APRA claims are time-consuming, too. Borrowers can waste precious time hoping and waiting for their problems to be solved by a superannuation payout, only to find their request only partially approved or even rejected altogether. Sometimes court processes are quicker than APRA’s decision on their request, and so they can lose their homes anyway and the lender might claim the money to cover outstanding costs after a sale fails to cover the loan amount. Early release of super in such circumstances is counterproductive.

The APRA data also reveal that very few borrowers were unsuccessful in applying for early release of super funds for mortgage assistance. A much higher proportion of applicants for funds to cover other purposes – including medical costs, home and vehicle modifications to accommodate severe disability, and palliative care and funeral expenses – failed. While the data do not show how many who applied specifically for mortgage assistance were only partially successful, in the 2008–09 year over a third of all “successful” applicants received less than they applied for. These partial payments might not have helped borrowers avoid repossession.

Interviews and a survey of home borrowers in receipt of claims of possession on their homes indicate that many borrowers enter a deep spiral when they face difficulties in mortgage repayments, running up credit card debt and refinancing over and over again. In short, the great Australian dream of home ownership entices households into too much borrowing and mortgagors go to great lengths to avoid losing their homes. If they seek early advice from independent financial counsellors, though, they may be able to sort through whether using super funds might be a useful crutch or simply throwing good money after bad.

In ‘The Great Australian Nightmare’ paper presented to the 6th National Housing Conference in Melbourne last month we confirmed that severe mortgage stress is set to heighten during 2010, and default and repossession rates will follow suit. That’s because interest rates, unemployment and underemployment are all predicted to rise. So it looks like dipping into super funds will increase too. •

Senior Research Associate Dr Anitra Nelson, Professor Mike Berry and Professor Tony Dalton all work in the AHURI–RMIT Research Centre in Melbourne investigating a range of housing and urban planning issues.

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