A fully-repaid mortgage is seen as crucial to living a comfortable retirement. But what if you still owe money on your home as your retirement date draws closer?
- How much do you need in retirement?
- Mortgage-free retirement is crucial
- Can you withdraw from your super to pay a mortgage?
- Can you withdraw super before you retire?
- Should you do it? An expert’s opinion
- Pros of using super to pay a mortgage
- Cons of using super to pay a mortgage
- Alternative strategies
Some advocate for would-be retirees using their superannuation balances to pay off whatever they still owe on their home loan, while others say this can be risky and the super would be put to better use elsewhere.
Here we’ll explore whether this is a viable strategy, how you can do it, and the pros and cons of doing so.
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Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the Product Provider’s web site. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term.
How much do you need in retirement?
The actual dollar figure needed to enjoy a ‘comfortable retirement’ is debated, but the Association of Superannuation Funds of Australia’s (ASFA) Retirement Standard is often referenced.
According to ASFA’s latest report, single retirees require super savings of $545,000 to afford a ‘comfortable’ lifestyle in retirement, while couples need $640,000 - assuming annual returns of 6% on investments and retirement at 65. This also assumes the retirees receive a part age pension and draw down all their capital.
This might seem like a lot, and other ASFA data shows the median balances among various age groups have some way to go to meet these goals. Given that almost half (44%) of Australians are concerned they won't have enough money to retire, and a World Economic Forum report saying Australians will outlive their superannuation account balances by a decade, building enough of a super nest egg to live off for retirement is crucial, especially when you consider we’re living longer than ever before.
However, for a ‘modest’ lifestyle in retirement, ASFA estimates that super savings of $70,000 would be sufficient for both couples and singles. The industry body said the amount required for a modest retirement is relatively low because the base rate of the Age Pension and other pension supplements covers much of the costs.
Meanwhile, its budget breakdowns in 2020 reported the cost of a comfortable retirement to be $62,562 per year for retired couples and $44,224 per year for singles. For a ‘modest’ retirement with little lavish spending, these numbers drop to $40,739 and $28,179 per year.
These ASFA figures assume retirees own their home outright, so the ‘housing’ costs don’t include home loan repayments or rent payments - just bills such as council rates, water and home insurance. The cost of retirement, as we’ll explain below, is much higher for non-homeowners…
Mortgage-free retirement is crucial
In the Treasury’s Retirement Income Review of 2020, it noted that homeownership and home equity was crucial to a comfortable retirement, and even noted that the home was the most important component of voluntary savings.
“Homeowners have lower housing costs and an asset that can be drawn on in retirement. If the decline in homeownership among younger people is sustained into retirement, there will be an increasing number of retirees who rent,” the review found.
“The system favours homeowners, such as through the exemption of the principal residence from the age pension assets test.”
Homeownership is intrinsically tied to wealth, but there is plenty of data showing declining mortgage numbers among not just younger Australians, but older ones as well. The mortgage debt held by Australians aged over 55 increased by 600% between 1987-2015, and over half of 55-64-year-old homeowners will still be repaying mortgages by 2031, according to the Australian Housing and Urban Research Institute (AHURI). Elderly homeless numbers even increased by 38% from 2011 to 2016.
Lower housing costs isn’t the only benefit of homeownership for retirees. A home can also potentially serve as a pool of equity which can be accessed.
"Homeowners also have the opportunity to access the equity in their home to supplement retirement income and manage longevity risk, although few currently do so," the report said.
"On average, equity in the family home represents the largest share of net wealth for Australians aged 65 and over.
"Available home equity can double the amount of their superannuation and help fund their retirement. Accessing home equity can offer a responsible, long-term solution to allow current retirees to boost their retirement funding.”
Renting retirees even worse off
Young people do make up the majority of renters, but they’ll be old one day, and retirees are already renting in increasing numbers. Half a million seniors are predicted to be eligible for Commonwealth rent assistance by 2031 (AHURI) which is a 60% rise from 2016. Even with rent assistance benefits (22% of which goes to pensioners), the gap between retirees who own and those who rent will only get bigger.
“Retiree renters on the Age Pension have income poverty rates well in excess of other retirees and working-age groups,” the review said.
“Renters and homeowners may have different outcomes in retirement. Retiree renters have much higher housing expenditure than retirees who own their home.
“Consequently, renters have lower disposable income after housing costs.”
So to summarise all of this: owning a home (and owning all of it) is crucial for a good retirement. The question is, can you use superannuation to become mortgage-free?
Can you withdraw from your super to pay a mortgage?
Technically speaking, once you reach the preservation age (the age you can access your super), you can withdraw your super to pay for anything. And that would include your mortgage. This is the money you’ve been saving for your entire working life, so once you hit 65 (or 60 if you’re retired), yes, you can use your super to pay off your mortgage.
If you turn 60 but want to continue working, you may still be able to withdraw up to 10% of your super balance every year through a transition to retirement income stream which you can then use to make either ongoing extra mortgage payments or bigger lump-sum payments. But once you turn 65, there’s no limit on how much of your super you can withdraw - even if you’re still working.
Although some loans will cap the maximum lump sum payments you can make at $10,000 to $30,000, most have no limit, meaning you can potentially pay off all of your remaining mortgage, taking into account any fees for extra and lump sum repayments.
Can you do it before you retire?
There are situations where you can withdraw from super before the retirement age (not including the now unavailable COVID-19 access scheme), but it’s unlikely you’ll be able to use these to pay off a mortgage prior to retirement. That’s because you usually need to meet special requirements, which are as follows according to the ATO:
- You have a terminal illness
- You have less than $200 in your super fund
- You’re a temporary resident permanently leaving Australia
- You are in severe financial hardship
- You meet ‘compassionate grounds’
- You’re temporarily or permanently incapacitated
You can also withdraw from your super to pay off mortgage debt, but this is only available for people in arrears or financial hardship, or if they’re behind on their council payments. The three eligibility criteria for this are:
- The lender or council is threatening to sell your home that you own
- You’re responsible for the loan repayments or rates because you own the home
- You can’t afford to pay the arrears without accessing your superannuation.
As you can see, a specific requirement is that you can’t make those repayments without accessing super, so you can’t use it to make any extra repayments. The lender will ask you to prove this through either a letter from your lender or a default notice if you have one, so there’s no cheating this scheme.
Should you pay off a mortgage with super?
There are advantages and disadvantages of paying the rest of your mortgage off with your super. It can be a viable strategy, but according to ANZ Financial Adviser Zac Ayoubi, there are some important considerations to take into account.
“Although this is a viable strategy, you can also consider how much will be needed to pay off the mortgage and whether the remaining funds will be enough to fund your retirement,” Mr Ayoubi told Savings.com.au.
“If you exhaust all the funds within your super, paying off the family home and having no other assets that could generate an income, this will leave you asset rich and income poor.”
Family homes are a non-assessed asset for Centrelink purposes, so you can still receive the pension as a homeowner. This would provide $24,551.80 per year for a single person and $37,013.60 for a couple.
“This is by no means generous and would pay the essential bills and put food on the table, however, on its own, it would be very restrictive,” Mr Ayoubi said.
“Drawing some of the funds from super to pay off debt on the family home could allow some retirees to qualify for a part Age Pension, as the family home is an exempt asset.
“The remainder of the super could then be converted to an income stream that would provide tax-free income that would supplement age pension entitlements to assist with day to day expenses.
“Over time, as the assessable value of the income stream reduces, the part pension payments received from Centrelink will increase.”
Pros and cons of withdrawing super for a mortgage
The main benefit is that it helps you to own your home outright in retirement so you don’t have to worry about mortgage repayments anymore. Withdrawing from your super is a quick way to wipe out that debt for good, especially if you have a decent-sized balance.
Another key advantage includes the fact you could qualify for higher age pension payments as the family home is not included in the assets test, unlike your super.
The biggest disadvantage is you’re taking money out of your retirement savings, which you’ll need to last. Superannuation continues to earn dividends and returns even after you retire, and these become a key source of your retirement income. The less you have in there, the less you potentially earn.
Another disadvantage is there are limits to how much you can take out pre-retirement (until you turn 65), and there are also lump sum repayment caps on certain home loans which may prevent you from paying it all off in one hit.
Ultimately, when deciding what to do, Mr Ayoubi said you should consider whether your returns from super will bring better value compared to the low interest rates on home loans, which makes repayments manageable.
“Interest rates are at historic lows, and indications from the RBA are that the rates are likely to remain low until 2024,” he said.
“Assuming your super is generating an average return of 8%, you could consider whether you want to pay off a debt that is likely to have a 3-4% interest rate for the next three years.
“The answer may still be yes, as it provides certainty in the outcome. Either way, it's an important consideration.”
What can you do instead?
There are a number of things you can do to reduce and eliminate your mortgage debt before you retire, so you can fully own your home without sacrificing your retirement money:
- Make extra repayments or lump sum payments without using super: Sacrificing a bit more of your post-super income can reduce your loan size without lowering your super balance. Use our Extra & Lump Sum Payment Calculator to help you.
- Increase money in your offset account: Storing money in a home loan offset account is generally more effective than stashing it in a savings account because home loan interest rates are typically higher than savings account interest rates.
- Use unexpected windfalls to make extra mortgage repayments: Any extra funds you receive - such as a work bonus, large tax refund, or inheritance - can be used to help you pay off your mortgage earlier.
- Switch to a cheaper home loan: You could still be paying far too much in interest on your loan, so see if you can refinance to a mortgage with a lower interest rate.
- Downsize when you retire: If you’re ready to retire but still owe some of your home to the bank, then you can sell it if it’s too big or if you can get a good price for it, then downsize to a cheaper home. This might be a good idea anyway if you want a fresh start for your retirement years.
“Downsizing releases some of the capital that can then be invested to fund retirement. Depending on sales timing, how long the property has been owned and your superannuation balance, it’s possible to contribute further funds towards your super,” Mr Ayoubi said.
“This additional wealth can provide a boost to your retirement nest egg, allowing a tax-free income to assist with lifestyle expenses.”
Savings.com.au’s two cents
Your home and your super are arguably your two most important assets, so making a decision involving both of them is a massive one. While we’ve laid out the pros and cons of paying your mortgage off with retirement funds and explained the importance of retiring rent-free and mortgage-free, there’s no definitive answer for what’s right and wrong. As an expert explained in this article, the compounding nature of super might mean that for some it’s wiser to leave it be.
Photo by Mark Timberlake on Unsplash