Chapter 2Mortgage offset opportunities
Overview
2.1Addressing Australia’s housing crisis is one of our most pressing national priorities. Housing supply remains low and sharp rises in the cost of housing has made renting or purchasing a quality home prohibitive for many people.
2.2Sadly, the lack of affordable housing options now risks undermining the financial wellbeing of Australians into retirement. As Ms Michelle Levy, who led the Quality of Advice review told the committee, home ownership is crucial to financial wellbeing:
Expressed another way, the most significant contributor to retirement outcomes was not how much superannuation a person retires with, but whether they own a home.
2.3Indeed, Australians who are not homeowners face long-term financial impacts, including ‘much lower standards of life in retirement’. This was emphasised in evidence from Super Consumers which suggests that not owning a home is a ‘defining factor’ of people who experience financial hardship or stress in retirement. In 2020, over half of Australian households aged 65 and over who were renting experienced income poverty. For single renter households, the rate of income poverty increased to more than 60 per cent.
2.4While Australia’s retirement system often assumes that retirees will own their home, data shows that this is increasingly no longer the case. As outlined in the committee’s first interim report, increased housing costs has meant that Australians are, on average, purchasing their first home later in life and the number of people who own their home as they approach retirement is in decline. Based on current trends, the Grattan Institute found that ‘by 2056 just two-thirds of retirees will own their homes, down from nearly 80 per cent in 2020’.
2.5A range of policy responses are required to ensure Australians have access to affordable housing. For instance, the Housing Industry Association (HIA) submitted that policy options should include support for ‘home ownership and housing investment as an important means of funding and supporting Australians in retirement’. Further, the HIA submitted:
One of these options should include consideration of a well thought out plan that would enable the equity Australians hold in their superannuation to be able to be used effectively to ensure they own their home now and in retirement, and at the same time retain a managed approach to financial security.
2.6However, options to harness superannuation to support Australians’ housing needs remain limited.
2.7One prospective policy option could be to give Australians the choice to use their superannuation assets to offset the cost of their mortgage. In commenting on this proposal, actuary Mr Jonathan Ng CFA FIAA stated that:
…using superannuation as a mortgage offset would have universal appeal to homeowners seeking to achieve the significant financial goal of owning their home sooner...
2.8At the same time, Mr Ng noted that the while the idea ‘has considerable merits, it is not without material implementation hurdles that will need to be overcome’.
2.9Given the importance of homeownership to retirement outcomes, the committee explores the use of superannuation for mortgage offset in this report, including the potential benefits for Australian homeowners, and the regulatory and product design features that may need to be considered if the idea is to be implemented.
Using superannuation for mortgage offset
2.10In general, a superannuation for mortgage offset scheme would involve establishing a mechanism by which a homeowner with an outstanding mortgage balance could opt to allocate part of their superannuation savings to a mortgage offset facility. This would reduce the interest payable on the mortgage and/or expedite repayment of the principal loan balance, thereby allowing for the mortgage to be discharged sooner.
2.11Once a mortgage has been paid off, the funds in the mortgage offset facility could be transferred back to the homeowner’s superannuation fund. Further, the homeowner may then have money available (in the absence of a monthly mortgage repayment) to make additional voluntary superannuation contributions.
2.12Rather than directly assisting first home buyers into the housing market, a superannuation for mortgage offset scheme would give homeowners ‘another choice as to how they could use their savings to achieve their financial goal of homeownership’.
Australians are regularly using superannuation to pay off their mortgages
2.13During the inquiry, the committee received evidence that—given the ‘historically high levels of household debt’ and the prevalence of 30-year-mortages in Australia—many people are anticipated to retire with a mortgage, or use their superannuation assets to pay down their mortgage.
2.14For instance, HomeSuper submitted that the proportion of people who retired with a mortgage had increased from four per cent in 2002 to 13 per cent in 2021. More recent data provided by Your Financial Wellness (as of September 2024) shows that a significant proportion of retirement-aged Australians have outstanding mortgage balances, including:
55 per cent of homeowners aged 60–64-years have a mortgage with an average outstanding balance of $243 000;
42 per cent of homeowners aged 65–69-years have a mortgage with an average outstanding balance of $206 000; and
15 per cent of homeowners aged 70-years and over have a mortgage with an average outstanding balance of $202 000.
2.15Your Financial Wellness explained that the above data suggests retirees are likely using their superannuation savings to pay down their mortgage:
The significant reduction in the percentage of homeowners with mortgage debt from 42% for those aged 65-69 to 15% for those aged 70 and over may suggest that many Australians are using their superannuation to pay down their mortgage as they enter retirement. While we cannot be certain, this is a reasonable assumption, given that the family home is exempt from means testing for the Age Pension. This exemption provides a strong incentive for retirees to eliminate their mortgage debt, thereby preserving their eligibility for government support while maintaining homeownership.
2.16Moreover, Mr Ng told the committee that Australian Bureau of Statistics’ data shows, on average, 32 per cent of lump sum benefit payments from the superannuation system are directed to paying off mortgages, enhancing property, or acquiring a new home. Further, data provided by Mr Ng suggests that in 2022–23, over 40 per cent of lump sum benefit payments from the superannuation system were directed to paying off mortgages, enhancing property, or acquiring a new home (as seen below in Figure 2.1).
Figure 2.1Use of lump sum superannuation payments by persons retired in the last two years
Source: Mr Jonathan Ng, Submission 40.1, p. 6.
Potential benefits of a superannuation for mortgage offset scheme
2.17There may be a range of potential benefits to providing Australians with the option to use their superannuation savings to offset their mortgage. As discussed further below, these benefits could include:
improved housing affordability;
timing of ownership; and
enhanced savings and superannuation awareness.
Improved affordability of home ownership
2.18The committee received evidence that a superannuation for mortgage offset scheme could contribute to improving the affordability of home ownership, as outlined in the below examples.
Example one—Real Estate Institute of Australia
2.19Noting the extent of Australia’s housing affordability challenge, the Real Estate Institute of Australia (REIA) submitted that ‘[s]upport for mortgage holders on their primary place of residence is a critical cost of living measure that must be considered’. The REIA emphasised the extent of the housing challenge, including that:
housing and rental affordability was in a ‘steady rate of decline’, with vacancy rates below the ‘healthy benchmark’ of 3 per cent;
home affordability is ‘at its worst level in 20 years’, exceeding the conditions mortgage holders faced during the Global Financial Crisis in 2008; and
the proportion of income Australians needed to meet the average loan repayment was 46.7 per cent nationally.
2.20At the request of the committee, the REIA prepared a preliminary case study on the use of superannuation to offset a mortgage, based on a range of key assumptions—including age, superannuation balance, interest rate, and income. In summary, the REIA found that for a first home buyer couple aged 36, with a mortgage balance of $519 000 at 8.8 per cent interest and who were able to offset their mortgage with $172 000 of their superannuation savings, could see their monthly mortgage repayment reduced from $4999 to $3342. This is modelled on the assumption that households would reduce their repayments in line with the interest saved.
2.21Further, the REIA submitted that the loan to income ratio for the modelled household reduced from 46.7 per cent to 31.2 per cent. The REIA noted this 15.5 per cent improvement to housing affordability ‘is equivalent to housing affordability levels in 2004.’
2.22The REIA concluded the use of superannuation to offset mortgage balances would improve housing affordability:
The addition of the flexible use of compulsory superannuation on a voluntary basis to offset mortgages would without doubt provide a major adjustment to housing affordability for those electing to use it. It would help in the long-term households achieve all three successful retirement components.
Example two—Mr Jonathan Ng CFA FIAA
2.23In considering the merits of a superannuation for mortgage offset scheme, MrNg provided the committee with modelling of the potential interest saved on a mortgage using an offset facility for the purchase of an $800 000 unit and, separately, for the purchase of a $2.25 million house.
2.24Mr Ng’s modelling made a range of assumptions, including:
a unit purchase price of $800 000;
unit mortgage repayments of $46 200 per annum;
a house purchase price of $2.25 million;
house mortgage repayments of $130 100 per annum;
a mortgage deposit of 20 per cent of the purchase price; and
a range of offset account balances which stay constant for the life of the loan.
2.25In the case of the unit mortgage, Mr Ng found that if a homeowner had $40 000 (5 per cent of the home value) in their offset account they would own the unit 3.6 years earlier (i.e. after 26.4 years rather than 30 years). The amount of interest over the life of the loan would be reduced by $164 000 (i.e. $583 000 would be paid in interest rather than $747 000). Further, if the mortgage offset was increased to $160 000 (20 per cent of the initial home value), the homeowner would repay the mortgage 9.9 years earlier and save $458 000 in interest payments.
2.26In the case of the house, Mr Ng found that if a homeowner had $112 500 (5per cent of the initial home value) in their offset account they would own the house 3.6 years earlier and save $462 000 in interest repayments. Further, if the mortgage offset was increased to $450 000 (20 per cent of home value) the homeowner would repay the mortgage 9.9 years earlier and save $1.28 million in interest repayments.
2.27Additionally, Mr Ng found that the abovementioned savings achieved with offset account value of 5 per cent of the home value was equivalent to achieving an after fees and tax return of 6.4 per cent per annum. The savings achieved with an offset account value of 20 per cent of the home value was equivalent to achieving an after fees tax return of 7 per cent per annum.
2.28In comparing the potential returns of the mortgage offset facilities with superannuation performance, Mr Ng observed that:
…mortgage interest rates have historically been less volatile than investment performance of the typical growth option available with a superannuation fund. This lower level of investment return volatility may be more attractive to homeowners.
Increased flexibility of ownership
2.29As discussed earlier, around a third of retirees already appear to be using their superannuation balances to pay down their mortgage upon retirement. However, there could be benefits in a superannuation mortgage offset scheme that helps Australians own their home sooner.
2.30For instance, Mr Ng told the committee that the super mortgage offset offers another option that gives consumers greater choice. He further explained:
…it’s about bringing homeownership forward, which provides some psychological benefits which are hard to quantify or put numbers around, but I think there is a benefit from owning your own home, having that security and knowing that you have a place to live in.
Improved savings and superannuation awareness
2.31The committee was advised that allowing superannuation to be used as a mortgage offset might encourage people to contribute more to superannuation accounts and enhance engagement by younger people in their superannuation.
2.32Additionally, the Centre for Independent Studies (CIS) submitted that the benefits of placing superannuation contributions in a mortgage offset could also include more stable predictable and liquid returns and reduce the value of assets counted towards the age pension assets test.
Who would benefit the most?
2.33A superannuation for mortgage offset scheme could benefit existing homeowners by giving them greater choice as to how their superannuation savings are used.
2.34Mr Ng considered that this would ‘certainly help people with a bit more super savings’ and would target ‘people more in that midlife, middle-age bracket’. Additionally, Mr Ng suggested the scheme could also present financial advantages compared to renting in retirement.
2.35However, the committee heard that the scheme would be ‘unlikely to improve housing affordability for those persons currently unable to enter the housing market, nor does it provide relief from cost-of-living pressures’.
Legislative design and implementation considerations
2.36The committee was advised by certain witnesses that the proposed scheme should be guided by the following principles:
(i)it should maintain the integrity of the superannuation system by not facilitating early release of superannuation savings; and
(ii)it should not have a direct inflationary effect on house prices.
2.37The following section outlines eligibility criteria and design features that may need to be considered in implementing a superannuation for mortgage offset scheme.
Eligibility criteria considerations
2.38Evidence provided to the committee suggests that eligibility criteria may need to be applied to a superannuation for mortgage offset scheme.
2.39For instance, Mr Ng submitted that consideration should be given to means testing access to the scheme so that the policy is targeted towards ‘people who are more likely to have a mortgage at retirement and would have used their superannuation savings to pay off their mortgage’. According to Mr Ng, such criteria ‘would avoid the perception that it is another scheme to help the rich get richer’.
2.40Further, Mr Ng submitted that consideration should be given to limiting the scheme to principal places of residence and/or first homeowners.
Design feature considerations
2.41To maintain the integrity of the superannuation system, the committee heard that a new mortgage offset product would need to be created. According to Mr Ng, the new mortgage offset account product would need to be implemented by banks or authorised deposit-taking institutions (ADIs) to ‘accept funds transfer to/from complying superannuation funds’ and to ‘prevent leakage out of the superannuation system’.
2.42According to the Australian Banking Association, there are 97 banks or ADIs across Australia. Many or all of these could be made eligible to issue a new mortgage offset product.
2.43Further, to avoid having an inflationary impact on house prices, Mr Ng submitted that:
…mortgage lenders should ignore any potential funds in the superannuation mortgage offset account when assessing a borrower’s borrowing capacity/loan serviceability or determining the size of the loan repayment (as they currently do). Doing so avoids borrowers being able to take out larger loans, which could potentially fuel higher house prices.
2.44Other design features considerations outlined by Mr Ng included:
no redraw—the mortgage to which the offset account is attached ‘should not have a redraw facility…to prevent homeowners from taking equity out of the mortgage that that has arisen from the interest savings generated by the offset account’;
additional contributions—additional superannuation contributions ‘could be directed to the mortgage offset account, up to the value of the outstanding loan’;
return of funds—funds in the mortgage offset account that are in excess of the balance of the mortgage should be returned to the homeowner’s’ superannuation fund. Additionally, funds held in the mortgage offset account when the loan is discharged should be returned to the homeowner’s superannuation fund;
portability—funds in a mortgage offset account should be portable to a another mortgage offset account should the homeowner change mortgage lenders; and
limiting changes to loan terms—mortgage terms may need to be altered to avoid the loan term being extended by the homeowner with a view that a reduced level of repayments could result in free cash flow that could indirectly have an inflationary impact on house prices if used towards investment property.
Potential issues with a superannuation for mortgage offset scheme
2.45The committee received evidence regarding a range of potential issues with a superannuation for mortgage offset scheme, including the financial risks to members and system-level costs. As discussed below, potential issues include:
lower investment returns for homeowners;
superannuation balance reduction;
implications for superannuation funds;
implications for mortgage lenders;
implications for the tax and transfer system; and
potential inflationary effects.
Risks of lower returns and reduced superannuation balances
2.46The financial impacts on members was a key consideration discussed in evidence to the committee.
2.47The CIS, for example, advised the committee that homeowners would likely receive lower average returns from placing their superannuation balance into a mortgage offset account compared to an average superannuation account. It highlighted that ‘instead of earning the usual 4.5% real after-tax average return on superannuation … the homeowner would save on mortgage payments’. CIS noted the real mortgage rate would be lower:
The RBA estimates that the average variable interest rate paid by owner-occupiers on outstanding loans in December 2023 was 6.4%. Adjusting for expected inflation of 2.6% (from indexed 10-year bond yields), that implies a real mortgage rate of 3.8%.
2.48In contrast, Mr Ng noted that the interest saved through an offset account is material and is on par with the net fees and tax investment earnings that would otherwise have been generated through a typical superannuation growth investment option, as evidenced in his case studies.
2.49According to a November 2023 article in the Australian Financial Review, the Grattan Institute holds concerns that superannuation placed in offset accounts would result in lower superannuation balances at retirement because it would not earn the same compounding return as superannuation fund.
2.50Conversely, Mr David Orford, actuary, argued that although the proposed scheme may result in lower retirement benefits for a homeowner unless the funds are repaid as their mortgage is reduced or paid out, ‘it would ensure greater security in retirement from the benefits that come from home ownership.’
2.51Mr Ng further advised the committee that, should a homeowner use a mortgage offset mechanism and therefore own their own home sooner, they are likely to have greater capacity to make voluntary superannuation contributions once their mortgage has been fully discharged ‘to make up for the investment savings foregone’.
Impacts on superannuation funds
2.52Some inquiry participants noted that a superannuation for mortgage offset scheme could have negative impacts on the operation of superannuation funds.
2.53For instance, practicing lawyer Ms Michelle Levy gave evidence to the committee on the challenges for superannuation funds in being asked to act outside their core function of investment trust:
Superannuation funds are not legal entities – they are trusts. A superannuation fund cannot do anything. Only their trustees can. This is a very important point which is I think lost when we refer to superannuation funds in the same way that we refer to banks and insurers. A trust is a very good vehicle for investing and keeping safe custody of other people's money – it is not I think a very good vehicle for conducting a financial services business and that is what trustees increasingly are being asked to do and are increasingly doing.
2.54Similarly, Mr Blake Briggs, Chief Executive Officer of the Financial Services Council, noted that ‘as soon as you require a superannuation fund to either transfer or allocate some resources to a particular investment, you impact its capacity to make investment decisions in the best interests of members’, a core requirement of the Retirement Income Covenant.
Impacts on mortgage lenders
2.55Some submitters to the inquiry noted that a superannuation for housing scheme may have some adverse impacts on mortgage lenders.
2.56For instance, Mr David Hartley submitted that banks may not see the proposal favourably, noting ‘they would need to hold capital against the full value of the loan but only be able to charge interest on the net balance’. That said, he noted that banks are experienced in ‘juggling their interest margins’.
2.57Mr Hartley further advised the ability to borrow must not be affected if such a scheme were introduced, ‘as otherwise the effect would be counterproductive and lead to higher housing prices’. He explained:
This can be achieved on a loan to value metric by ensuring that the lender does not have access to the account balance in the event of default and, on a liquidity metric, by recognising that the account balance could be transferred to another investment option at short notice.
2.58Additionally, Mr Ng advised that implementing a super for mortgage offset scheme would likely be complex and costly for mortgage lenders:
Implementing the Proposed Scheme will have many operational hurdles that are likely to be expensive for mortgage lenders and take a significant amount of time to overcome (e.g. creating the new product, establishing processes to restrict transfers only to/from complying superannuation funds to prevent leakage from the superannuation system, establishing appropriate regulatory framework etc).
Implications for the tax and transfer system
2.59In his evidence to the inquiry, Mr Ng noted that a superannuation for mortgage offset scheme would have implications for Australia’s tax system.
2.60For example, Mr Ng submitted that the scheme would result in reduced tax receipts for government:
The lack of investment earnings on funds held in a superannuation mortgage offset account means the Government does not receive the tax associated with the foregone investment earnings. This is further exacerbated by the potential reduction in size of the overall superannuation system…
2.61Further, Mr Ng identified that the scheme could increase costs to the Australian Government as more people may potentially become eligible to claim the aged pension:
In thinking about it, it does come down to the other risk for the government, which is the money in the offset account is not growing. So when it goes back to the system, people won't have as much in their superannuation savings. They own their own home, which is exempt from the assets test for the age pension. It could mean there could be some people who, because they're now in the home, they could be pushed on to the age pension. It is something to think about. Obviously, costing would need to be done to figure out the impact of that, where there could be an increased cost to the age pension.
2.62The risks to tax receipts may be neutralised if mortgage offset accounts were taxed at a deemed earnings rate according to what the superannuation amount would have earned had it remained in the fund.
Potential inflationary effects
2.63Some evidence also raised concerns that a mortgage offset scheme would have an inflationary effect on house prices.
2.64The Grattan Institute is reported to have concerns about the effects on inflation from superannuation savings use in mortgage offset accounts. Whilst the proposal would reduce household interest payments, it could lead to more Reserve Bank of Australia (RBA) rate rises to reduce demand side pressures and slow inflation.
2.65Mr Ng submitted that the proposed scheme has the potential to have indirect inflationary impacts over the medium to longer term if homeowners later find themselves in a financial position to purchase an investment property, having taken advantage of this scheme. However, he advised that ‘with careful design I believe it is possible to avoid having a direct inflationary impact on house prices.’
2.66Mr Ng emphasised that any superannuation mortgage offset scheme must ensure offset funds are not taken into account when assessing loan capacity or serviceability to avoid direct inflationary impacts on house prices.
Other options
2.67The committee received some evidence on policy options that may provide an alternate to a superannuation mortgage offset scheme.
2.68For instance, Ms Michelle Levy indicated her support for a co-investment model, noting it ‘would have to stand on its own feet as an investment of the superannuation fund’. The committee has previously explored co-investment in its first interim report.
2.69Additionally, the CIS advised that while ‘high unexpected mortgage payments represent an important social and economic problem’, other levers are available to ameliorate the issue and reduce likelihood of recurrence.CIS stated:
At the top of this agenda should be removing distortions and obstacles to private sector remedies. In particular, homeowners would have more stable and predictable repayments if fixing mortgage rates was more common.
Committee view
2.70The age pension and compulsory superannuation are significant pillars of a successful retirement, with home ownership forming a key component of the voluntary savings pillar.
2.71Despite the significant role of homeownership towards a secure retirement, one third of Australians are retiring with a sizeable mortgage, and evidence indicates that lump sum superannuation payouts are frequently used to close out mortgages upon retirement.
2.72The committee notes that compulsory superannuation and mortgage offset accounts are already commonplace in Australia. As of June 2024, Australians’ superannuation assets totalled some $3.9 trillion dollars, with contributions having increased by 11.2 per cent ($183.9 billion) over the year. Research published by the Reserve Bank of Australia in 2021 suggests that mortgages with offset accounts ‘comprised around 40 per cent of mortgages in Australia’ and ‘mortgages with redraw facilities make up around 70 per cent of the total number of home mortgages’.
2.73The proposed scheme could facilitate consumer choice around how individuals use their superannuation savings to achieve their individual long term financial goals, particularly home ownership, targeting individuals and households with a moderate income and superannuation balance.
2.74Enabling individuals to use superannuation saving to offset their mortgage balance during their working life would have the benefit of reducing interest repayments or paying off a loan sooner. This would in turn provide a greater sense of security prior to and into retirement.
2.75The committee acknowledges that there are other proposed models on how such a scheme could be designed, and therefore makes the following recommendation.
2.76The committee recommends that the Australian Government further explore the potential design of a super mortgage offset product applicable to a homeowner’s primary residence; the pros and cons of different options; and the regulatory settings that would be needed to permit development of such a product. Issues for further investigation should include:
the amount of superannuation a homeowner could roll into a “Super mortgage offset account” product issued by an Authorised Deposit-taking Institution;
what regulatory permissions would be needed for such a product, and how these might be legislated through the relevant superannuation and banking supervision legislation;
whether an Authorised Deposit-taking Institution issuing such a product would be required to apply for a license variation through the Australian Prudential Regulation Authority as the regulator;
what the tax implications would be, for individuals and the government, of allowing an amount of a person’s superannuation to be rolled into a “Super mortgage offset account”;
whether the superannuation amount in the “Super mortgage offset account” would need to be held as cash by the Authorised Deposit-taking Institution;
the way in which the amount in the “Super mortgage offset account” is required to be returned to the homeowner’s superannuation account once the outstanding mortgage falls below the amount in the offset account (and, ultimately, is discharged); and
whether eligibility for any “Super mortgage offset account” should be limited, either initially or on an ongoing basis, to first-home buyers.
Senator Andrew Bragg
Chair
Liberal Senator for New South Wales