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The hidden risk to early superannuation withdrawal that no one told you about

Australians are rushing to access their superannuation early amid the COVID-19 pandemic but there’s a key risk of doing this that few would be aware of.

The latest data showed that 2.4 million Aussies have applied to withdraw $25 billion from their nest egg, reported the Australian Broadcasting Corporation.

But before you join the frenzy, you should be aware that this could impact on your ability to get a new home loan or refinance an existing mortgage.

Banks’ dim view

I was told by a mortgage broker contact that lenders are likely to reject applications from those that have tapped into this support scheme as they are deemed to be under financial hardship.

That’s fair enough because you need to declare that you are facing financial stress in the first place before you can get approved by the tax office.

From what I understand, Commonwealth Bank of Australia (ASX: CBA) is the strictest and it’s rejecting just about anyone that have tapped into their super.

The other lenders like Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking GrpLtd (ASX: ANZ) are heavily scrutinising such applicants.

Feeding the housing downturn

You would think that those forced to gain early access to super won’t be apply for housing loans, but this isn’t the case. The mortgage broker I chatted with said many of their clients (usually first home buyers) have done this and were shocked to find they can’t get a loan now.

This coincides with the latest ABS data that showed new loan commitments plunged a seasonally-adjusted 11.6% in May. This is the biggest monthly decline on record and these factors don’t bode well for house prices.

Meanwhile, many looking to refinance to a lower rate and to capitalise on the generous cash back given by the big four have also been caught out.

3 dangers from accessing your super early

It appears that many Aussies are applying for the early super release even though they don’t really need the cash.

The ATO recently issued warnings that they are coming after those who have abused the program, which allows you to withdraw $10,000 in FY20 and another $10,000 in FY21 tax free.

Early indications are many Aussies have filed for the second tranche since the start of this financial year on July 1.

Now there are three reasons why you should only apply for early super payouts only if you really need it. Taking money out now will leave you significantly poorer when you retire, you can get in trouble with the tax man if you treat this as free money and you can hurt your chances of getting a bank loan.

Foolish takeaway

However, this assumes the banks find out about it. Getting access to super won’t show up on your credit report. So, the only way for lenders to know is if the applicant is required to show bank statements and the super withdrawal shows up.

Another support program with a hidden sting in the tail is the loan holiday scheme offered by lenders.

Borrowers can apply to suspend mortgage repayments till October and the banks are offering a further four-month extension for qualified customers.

But if you are on a repayment freeze, you won’t get refinanced as you are also deemed to be under financial stress.

Lenders are particularly sensitive to living up to their responsible lending obligations these days, thanks to the Banking Royal Commission.

As the adage goes, nothing comes for free.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking. Connect with me on Twitter @brenalu.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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