More Australians are retiring with a big mortgage. Should they use superannuation to pay it off?
Not so long ago the retiree stereotype looked something like this: cashed up empty nesters offload their paid-off family home in the city and take off up the coast for a couple of decades of carefree, debt free, living with fishing, tennis and a bit of travel, too.
This relaxed scenario was possible because when it came time to give up work, most Australians owned their home outright. Without rent or mortgages to pay, "an age pension and a little bit in super was enough to get by," says Rachel Ong ViforJ, Professor of Economics at Curtin University and a specialist in mortgage stress and housing assets among older Australians.
While rising house prices are pushing home ownership out of reach for younger generations, paying down a mortgage is a growing problem for those at the other end of the property ladder: retirees are increasingly leaving the workforce with mortgage debt which was far from the norm among middle income Aussies even a decade ago.
The implications for a financially stable old age are stark because links between insecure housing, disadvantage and poor health outcomes are well-established, Ong ViforJ says. "The pension, super and voluntary savings are the three pillars of the retirement income system but home ownership has become a fourth pillar. That's because of how important it is in supporting people's well-being in retirement."
Yet as more and more Australians retire with healthy superannuation balances, the allure of using that money to pay down a mortgage is strong.
But is it a good idea? And what would a retiree live on if they pillage their super to pay off the house?
A lifetime of mortgage debt
Between 1990 and 2015 the percentage of 55-64 year olds who owned their home outright fell from 70 per cent to 47 per cent, according to research by the Australian Bureau of Statistics. During the same period, the percentage of those carrying a mortgage debt rose from 12 per cent to 31 per cent. The balance were renters.
A 2018 Grattan Institute report came up with a similar trajectory: in 1995 72 per cent of Australians aged 55-64, the years prior to retirement, owned their home outright. In 2015-16 – the most recent figures available – this figure had fallen to 42 per cent.
That leaves more 60 and 70-somethings with mortgage commitments.
In an effort to hang onto their homes when they stop earning, Ong ViforJ says clues are emerging to suggest that more and more retirees are using their superannuation balance to pay down mortgage debt.
Productivity Commission report found that among those who take out a superannuation lump sum, the main use of those lump sums was to pay off a mortgage and ViforJ says her own research for AHURI shows that when superannuation balances fall, mortgage debt also falls, implying a relationship between the two.
Why is the trend growing?
Brendan Coates, the economic policy program director at the Grattan Institute and author of Money in Retirement: More than Enough, sees the trend as "a pretty rational response to rising house prices".
"People are spreading the cost of paying off their home over more of their life, rather than trying to squeeze into paying it all off during their working life," he says.
Two factors are adding pressure to the ability to service mortgage debt: higher property prices is the obvious one — now around 10 times the average wage compared with three or four times two decades ago.
There is another reason, too. Those high prices mean many people delay entry to the property market as they save a deposit leaving fewer working years to pay off the loan.
Yet Coates, and also Ong ViforJ, point out that using super to pay a mortgage can make tax sense: a primary residence is exempt from assets tests while super is not.
And then there's the record low interest rates: consider that with current rates every dollar used to pay down a mortgage is saving less than 3 per cent in interest whereas that same dollar invested in superannuation has potential to return 7 or 8 per cent.
It is understandable that for those approaching retirement, preferencing super over mortgage could seem like a logical move, then the extra funds generated can be diverted back into property on retirement
What would Keating think?
When Paul Keating's government introduced Superannuation Guarantee in the early 1990s it was not designed as a strategy to pay off a home loan.
Yet the cost of housing, coupled with wage stagnation (that some have blamed on the Super Guarantee which is about to be increased further), leaving less spare cash to funnel into a mortgage means Ong ViforJ predicts the situation will become more common.
While the current generation of retirees bought their homes when property was more affordable, they have also accumulated less super than the generations below: most workers were well into their careers before Keating's super guarantee took effect.
Those who began their working lives in the early 1990s and after, on the other hand, are facing much higher property prices but they will have many more years of superannuation accumulation to draw on when they do retire.
"I think in the future we will see more and more people just looking to shift superannuation wealth into the house," Ong ViforJ says.
So what's the downside?
At the heart of this issue lie questions over how best to supply safe and affordable housing for older Australians.
Grattan research shows that those who own a home outright spend around 5 per cent of their retirement income on housing, those who pay a mortgage or rent spend up to 30 per cent of their retirement income on keeping a roof over their head. Many renters ultimately require government rent assistance.
Renting — the main alternative to home ownership in retirement — is often a more precarious path. Renters need more money in super to be able to afford outlays, but this is often not the case, especially for single women.
But, if super is used to pay of a mortgage, what will retirees live on?
One scenario is that many will be pushed back into the pension system.
"That's the policy dilemma we face now," Ong ViforJ says. "The appropriate policy response is to deal with high house prices but in order to do that you have to bring in measures that will bring prices down."
But holding wealth in property is not necessarily a bad thing.
Coates says one option is using that equity as an alternative retirement income stream by taking out a reverse mortgage on the home using the federal government's Pension Loans Scheme which he believes is currently under-utilised: only 3,100 people used it as of 2019-20.
"The answer is going to be that people start to use more of their housing assets in retirement," he says. "Otherwise, all they're doing is reducing their quality of life and leaving larger inheritances to the next generation."