Chapter 6Loan collateral
Superannuation as loan collateral
6.1The committee also explored the feasibility of allowing first home buyers to use their superannuation balance as collateral against a home loan.
6.2In contrast to superannuation withdrawal schemes, this approach aims to reduce the size of a required deposit without depleting retirement savings. The committee was advised that superannuation balances of first home buyers are typically around $30 000 to $40 000, which could be used as collateral for a loan.
6.3The Centre for Independent Studies (CIS) suggested deposits could be reduced by the superannuation balance amount, serving as ‘a big step to getting first home buyers over the deposit hurdle’.
6.4Some witnesses to the committee proposed that a superannuation collateral scheme could be preferential to a superannuation withdrawal scheme, particularly because superannuation balances remain within the funds and continue to receive compound growth.
6.5Mr Simon Croft, Chief Executive Industry and Policy at the Housing Industry Association, noted using superannuation balances in a guarantor type of approach to a loan, rather than withdrawing the funds, warranted further consideration.
6.6The CIS compared a hypothetical superannuation-as-collateral policy against one enabling buyers to borrow directly from superannuation savings. It noted any preference between the two policy approaches partly depended on how the variables were weighted, as outlined in Table 6.1.
6.7The CIS explained its comparison:
If protecting superannuation balances was most important (due to either economic considerations or political constraints), or if one thought that the deposit was the biggest hurdle to home ownership, collateral would be preferred. Alternatively, if one thought the biggest obstacle to ownership was high mortgage payments, borrowing from superannuation would be more effective.
Table 6.1Policy Comparisons
| | |
Deposit | Reduced by 40% of super balance | Reduced by 100% of super balance |
Mortgage payments | Unaffected | Higher |
Homeowner’s capital gain | Lower | Unaffected |
Superannuation balance | Lower | Normally unaffected |
Source: Centre for Independent Studies, Submission 39, p. 13.
6.8Further, the CIS advised that a superannuation-as-collateral scheme would not need to be limited to first home buyers, or be limited to a proportion of the balance as superannuation balances are unlikely to be touched.
6.9Use of superannuation as security on a home loan also offsets some risk for the lender which may increase likelihood of loan approval or access to larger loans, and could result in lower interest rates or fees. Dr Peter Tulip of the CIS advised:
If someone wants to borrow money from them, that's a profitable trade for the bank. But the bank is, understandably, worried about losing money on the loan and they have a whole lot of prudential requirements to avoid making losses. This would be another mechanism to do that. They would not require the borrower to be posting a large deposit, because the function of that would be covered by the security or the collateral.
6.10The 2022 Tax and Revenue Committee Inquiry into housing affordability and supply in Australia recommended the government develop and implement a policy allowing the use of superannuation assets as home loan security for first home buyers.
Risks
6.11Submitters noted the greatest risk from using superannuation for home loan collateral was in the case of foreclosure.
6.12Dr Tulip advised retirement savings would only be affected in the rare case of foreclosure. He stated foreclosure was exceptionally rare in Australia: ‘a lot of loans will go into arrears for a bunch of reasons, but the borrower makes that good fairly soon’.
6.13The CIS submitted the following analysis of foreclosure frequency:
Bergman (2020) examined 2.8 million residential mortgages that were reported in the RBA’s Securitisation Dataset at any point between July 2015 and June 2019. Around 45,000 of these loans entered 90+ day arrears at some point during this period (around 1.5 per cent of loans) and only 3,000 loans (0.1 per cent) proceeded to foreclosure. There are reasons for suspecting this foreclosure rate to be unusually low. In particular, the period was short and saw rising house prices, though it also saw an increase in unemployment. But even if defaults were an order of magnitude greater, they might still be considered infrequent.
6.14While the likelihood of foreclosure is low, the consequences for the individual are extreme, potentially losing their home as well as a portion of retirement savings.
6.15Another risk to borrowers is meeting higher repayment amounts. Home buyers would need to repay the full loan amount as the superannuation savings would not be applied directly to reducing the loan balance. On this point, the CIS noted ‘the size of the loan, and hence repayments, would increase commensurately’.
Feasibility
6.16A number of factors would need to be considered when assessing the feasibility of a super-as-collateral approach to supporting first home buyers.Agreements would need to be in place between the relevant bank and pension fund. A minimum superannuation balance may be required for the scheme to be appealing to banks.
Serious consideration would also be needed as to the mechanics of the scheme should individuals with a collateral-back loan choose to change superannuation funds.