Imagine this: You’re sitting on the beach, sipping a margarita and watching the sunset. You’re carefree and relaxed because you know that your mortgage is paid off, all thanks to your superannuation.
Industry pundits have long advocated for a superannuation overhaul, which would allow Australians to use their superannuation fund more like Singaporeans, where the Central Provident Fund is designed to enable individuals to fully own a property once they retire.
The model has played a significant role in Singapore, achieving one of the highest homeownership rates in the world, reaching 89.3% this year, while Australian home ownership has been on a steady decline, falling 66% in 2022.
The downward trend was amplified by the financial distress many Australians experienced during the pandemic and the subsequent attempts by the Reserve Bank of Australia to get inflation under control by increasing interest rates.
Last financial year, the Australian Taxation Office (ATO) disbursed more than $570 million in superannuation funds on compassionate grounds to help Australians cope with the rising cost of living and mortgage stress.
Who can use their super to pay off a mortgage?
Unfortunately, not everyone can access their superannuation early to help with their mortgage repayments.
Generally, superannuation can be used to pay off a mortgage when you reach your preservation age (between 55 and 60 years of age) if you have permanently retired.
You may be eligible for early release of super before preservation age if you have been diagnosed with a terminal illness, or you’re unable to work because of a medical condition, or you’re experiencing severe financial hardship.
Conditions of super release for a mortgage
You can only withdraw money from your superannuation to pay off your mortgage if you meet one of the following conditions:
- You have reached your preservation age
- You are retiring
- You have experienced termination of employment
- You are experiencing severe financial hardship
- You are terminally ill
- You are temporarily or permanently unable to work
- You are participating in the First Home Super Saver Scheme
- You are facing foreclosure or forced sale of your home.
The COVID-19-related early superannuation release program ended on 31 December 2020.
Commonwealth regulations typically mandate that a portion of your superannuation funds must remain preserved until you satisfy one of the following criteria:
- Cease employment at the age of 60.
- Retire permanently from the workforce, either at or after reaching your preservation age (which falls between 55 and 60).
In practical terms, this implies that you cannot access your superannuation funds until you fulfil one of these release conditions.
Your preservation age depends on your year of birth. The preservation age is currently the lowest for those born before 1960, who can access their super at 55, with every subsequent generation having to wait longer to access their preserved retirement funds.
You can find out more about the preservation age rules on the ATO’s website.
Eligibility for early release of super
You may be able to get early access to your superannuation to pay off your mortgage if you are experiencing severe financial hardship. To be eligible, you must meet the following criteria:
- You must be unable to meet your reasonable living expenses and your mortgage repayments.
- You must have exhausted all other options for financial assistance, such as government benefits and borrowing from family or friends.
- You have to confirm that you have sufficient superannuation balance to cover the expense and withholding tax.
- Your superannuation fund allows early superannuation access.
To apply for early access to superannuation on compassionate or financial hardship grounds, you will need to complete an application form and provide supporting documentation. Your superannuation fund will then assess your application and make a decision.
Applying for early release can be confusing because the process varies depending on the reason. The ATO handles compassionate grounds applications directly, which can be submitted online or on paper. However, severe financial hardship or terminal medical condition applications are managed by individual super funds, not the ATO.
How to use your super to pay off a mortgage
Once you’ve confirmed that you’re eligible to use your super to pay off your mortgage, there are a few different ways to go about it.
One option is to make a lump-sum payment. This can be a great way to reduce your mortgage balance and shorten the term of your loan.
Another option is to use your superannuation to make regular mortgage repayments. This can help to reduce your monthly repayments and make your mortgage more manageable.
You can also use a combination of these two strategies. For example, you could make a lump-sum payment to reduce your mortgage balance and then use your superannuation to make regular mortgage repayments.
Other ways to use super to buy property
Beyond accessing your super early to pay off your mortgage, there are other ways to leverage your super to accelerate property ownership.
- First Home Super Saver Scheme (FHSS): This scheme allows first home buyers to salary sacrifice or make extra contributions and withdraw up to $50,000 from their superannuation to contribute to a deposit on their first home.
- Self-managed super fund (SMSF): An SMSF is a type of superannuation fund managed by the individual or trustee. This gives you more control over your investment options and may allow you to borrow money from the SMSF to buy a property.
Should you use your super to pay off my mortgage?
If you are considering using your superannuation to pay off your mortgage early, it is important to weigh up the pros and cons carefully. You should also seek financial advice from a qualified professional.
What to consider first
- Tax implications: When you withdraw money from your superannuation early, you may have to pay tax on the amount you withdraw. The tax rate you pay will depend on your age and how much money you have in your superannuation. There are no special tax rates for early release of super based on severe financial hardship. You will be taxed at the normal super lump-sum rate of between 17 and 22 per cent unless you’re older than 60, in which case you generally won’t be taxed
- Scams: There are scammers who target people who are considering withdrawing their superannuation early. They may offer to help you get early access to your superannuation or promise you high returns on your investment. It is important to be aware of these scams and to only deal with reputable financial advisors. The Australian Securities and Investments Commission (ASIC) maintains a register of financial advisers who provide advice on investments and superannuation.
- Long-term impact: Withdrawing money from your superannuation early can have a significant impact on your retirement savings. This is because you will have less time for your money to grow and compound.
Tips to avoid getting scammed
It is important to consider the tax implications and potential scams before using your superannuation to pay off your mortgage early.
- Be wary of ‘too good to be true’ offers. Superannuation and tax ‘strategies’ to reduce your mortgage are often advertised on social media. These strategies should be carefully considered because they often involve hefty payments for educational seminars, for instance, and offers that seem too good to be true.
- Do your research. Check the ASIC’s website to see if the company or person you are dealing with is registered.
- Be careful what information you give out. Scammers may ask for your personal information, such as your bank account number or tax file number. Do not give out this information unless you are sure that the company or person you are dealing with is legitimate.
- Get an opinion from qualified financial educators and advisors. Accounting and financial planning associations are often a good place to educate yourself on topics such as the early release of superannuation.
Important numbers to know
- The ATO cannot process applications for early release of super over the phone. However, they can assist you with the process by answering your questions about the application process on 13 10 20.
- If you need urgent advice on accessing your super, you can call the National Debt Helpline on 1800 007 007 on weekdays from 9:30am to 4:30pm.
- If you think you may have been super-scammed, contact ASIC on 1300 300 630.