Paul's Insights: Today's financial relief can come at a cost
The COVID-19 pandemic is not just influencing our lives today. It could impact our finances for many years to come.
In March, the banks announced that home owners facing financial stress had the option to defer mortgage repayments for six months. According to the Australian Banking Association (ABA), that has seen half a million home loans – $175 billion worth of debt – put on pause.
In the last few days, bank regulator APRA has allowed banks to extend their repayment holidays to a maximum of 10 months or until 31 March 2021, whichever comes first.
On top of this, APRA reports that over recent months, super funds have paid out $19 billion to members experiencing financial hardship. In the first week of July alone, 511,000 applications were made to withdraw up to $10,000 out of super – including 346,000 requests from people who’d already withdrawn money before 30 June.
I realise that we are living in difficult times, and taking care of our health and wellbeing is a priority. But putting off mortgage repayments and withdrawing money from super early are steps that shouldn’t be taken lightly.
On the home loan front, deferring repayments doesn’t mean the interest meter stops ticking. Catching up with the accrued interest bill can mean facing higher repayments or an extended loan term once you resume repayments. The ABA has said that some home owners who earlier took a breather from repayments have started to pick up where they left off. That makes a lot of sense if your budget can handle the cash outflow.
Withdrawing money from super can provide desperately needed cash if you’re facing financial stress. However, it should be seen as a last resort – and not just because it can leave a dent in the value of your final retirement savings.
The Tax Office has warned that it will take action where people deliberately exploit the option to pull money out of super during COVID-19. And it’s easy to get caught out. The single touch payroll system gives the Tax Office real time data that shows whether people are employed and how much they are being paid. For the record, the Tax Office is also keeping a lookout for people who withdraw from super then recontribute the money to claim a tax deduction.
The main conditions to be eligible for early access to super include being made redundant, having your work hours cut by at least 20% or receiving JobSeeker payments. Fudging a request to access your super early can mean copping penalties of $12,000 or more. So, dipping into your super early is an option – but only if you really need the money.
Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.