Radical solution to help millions of struggling Aussies pay off their mortgage after aggressive interest rate rises

A Liberal senator is calling on Australians to put their pensions into an offset account so they can absorb rising mortgage rates.

The Reserve Bank’s thirteen rate hikes in eighteen months have resulted in monthly mortgage repayments rising by 69 percent.

With variable mortgage rates approaching seven percent, Liberal Senator Andrew Bragg has proposed allowing borrowers to transfer money from their pensions to an offset account at the bank.

“Someone with a mortgage in a major city like Sydney could use super as compensation to substantially reduce their interest costs in a way that no other government policy could achieve,” he said. The Australian Financial Review.

Real estate in Sydney is so expensive that someone buying a home with an average price of $1.397 million would have to earn more than $186,000 to qualify for a $1.117 million loan with a 20 percent deposit.

Under Senator Bragg’s proposal, a high-income individual borrower or a dual-income couple would be able to transfer an average $171,000 super savings balance into their savings account.

Banks charge a lower interest rate if a borrower with a variable interest rate has more money in the offset account.

With variable mortgage rates approaching seven per cent, Liberal Senator Andrew Bragg has proposed allowing borrowers to transfer money from their pensions into an offset account at the bank (stock image)

The Reserve Bank of Australia this month raised interest rates by another quarter of a percentage point to a 12-year high of 4.35 percent.

KPMG chief economist Dr. Brendan Rynne said Senator Bragg’s plan would actually lead to more rate increases because borrowers would now simply have more money to spend instead of having to wait until they turn 60.

“All you’re going to see is a stimulative effect and an increase in aggregate demand – that increase in aggregate demand is likely to keep inflation at a higher level than it would otherwise be,” he told Ny Breaking Australia.

“Then you will see that the Reserve Bank will necessarily have to continue to strengthen and tighten monetary policy to compensate for that higher domestic demand.”

Pension returns for balanced funds have delivered an average annual return of 6.5 percent over the past decade, data from SuperRatings shows.

The Commonwealth Bank now charges 6.79 per cent interest for variable rate borrowers with a 20 per cent deposit.

By putting this superannuation money into an offset account to reduce interest payments, an Australian borrower could miss out on potential super returns later on.

“We know that superannuation provides long-term returns of more than six percent,” Dr. Rynne said.

“What you’ll find is that homeowners are trading off longer-term returns by putting it in the offset account.”

The coalition allowed Australians in 2017 to take $15,000 a year out of their super to buy their first home, provided they made a voluntary contribution.

The First Home Super Saver Scheme allows a total of $50,000 to be withdrawn to fund a mortgage deposit.

Former Prime Minister Scott Morrison’s government in 2020 also allowed Australians financially affected by Covid lockdowns to withdraw $20,000 in super money, in two $10,000 installments.

Senator Bragg was previously policy manager for the Financial Services Council, the lobby group for retail super funds

But barring a financial emergency, super has only been allowed to retire since the mandatory employer contribution scheme started under Labor in 1992.

Mandatory super contributions for employers rose to 11 percent on July 1 and will increase annually in half-percentage-point increments until they reach 12 percent in 2025.

Senator Bragg was previously policy manager for the Financial Services Council, the lobby group for retail super funds.

The average super balance in Australia was $170,191 in 2020-21, Australian Taxation Office data shows.

The Reserve Bank indicated this month that “further tightening” may be needed to tackle inflation, with the annual level of 5.4 percent for September well above the 2 to 3 percent target.