As more Australians carry mortgage debt into retirement, the challenge of managing finances in your golden years is becoming increasingly common. In fact, about 36% of retirees still have a home loan, up from 23% just a decade ago.
This trend is driven by soaring property prices, later retirement ages, and increased use of equity drawdown loans to fund everything from holidays to medical costs. So, what should you do if you're heading into retirement with debt? Let’s explore your options.
Keeping Your Home and the Debt
Retaining your family home in retirement can be a good choice if managed strategically. Not only does it secure your most valuable asset, but you may still qualify for the Age Pension depending on your financial circumstances.
Take Jane, for instance. Her home is worth $2 million, with an outstanding $200,000 mortgage. She also has $800,000 in superannuation, which makes her ineligible for the pension as her assessable assets exceed the $695,500 cut-off.
If Jane uses $200,000 from her super to pay off the mortgage, she saves on repayments, reduces her assessable assets, and becomes eligible for a part pension. This not only improves her cash flow but also gives her access to pensioner benefits.
While this approach requires dipping into super, it allows Jane to stay in her home while securing some financial breathing room.
Downsizing to Clear the Debt
Downsizing is another popular option for retirees looking to eliminate mortgage debt. Selling your home can free up funds for travel, dining out, and other lifestyle perks, and it often means moving into a more age-friendly property.
The government’s downsizing contribution scheme even lets homeowners over 55 contribute up to $300,000 (or $600,000 for couples) to their super from the sale of their home. However, any superannuation balance is counted as an asset when you reach pension age, which could impact your eligibility for the Age Pension.
Let’s revisit Jane. If she sells her $2 million home, buys a smaller $1.4 million apartment near family, and pays $100,000 in transaction costs (like stamp duty and fees), she’s left with $1.1 million in financial assets. While she’s debt-free and financially comfortable, Jane no longer qualifies for the Age Pension.
Downsizing can provide lifestyle benefits, such as moving closer to family or into a community with better services. However, retirees need to weigh these advantages against the financial trade-offs.
What About Renting in Retirement?
Renting can be challenging on a fixed income, especially with rising housing costs. Unfortunately, older renters are at higher risk of financial strain or homelessness.
The good news is there are options. Many retirement communities—both profit and not-for-profit—offer rental models or discounted entry fees for retirees with limited means. Some residents may also qualify for rent assistance, which provides up to $5,751 per year in extra social security benefits.
Retirement villages can offer affordable housing and a supportive community for older Australians. While it might not be your first choice, it’s worth considering if owning a home isn’t financially viable.
Choosing the Best Path for You
Managing your mortgage as you approach retirement is a balancing act between financial, emotional, and lifestyle considerations.
If you choose to keep your home, using super to pay off the remaining debt can improve your cash flow and preserve your largest asset. Alternatively, downsizing can wipe out debt and bolster your superannuation, though it comes with transaction costs and could impact pension eligibility.
For those renting in retirement, exploring community housing or retirement villages may provide the stability and affordability needed to enjoy your later years.
Every retiree’s situation is unique, so it’s essential to seek professional advice tailored to your needs. At Dream Catchers Lending, we’re here to help you navigate these decisions and find the best financial path forward.
Dream Catchers Lending is an MFAA-accredited member and a Certified Divorce Specialist. Feel free to book an obligation-free virtual appointment or leave us your details and we'll be in touch.
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