Retiring with a mortgage: What are your options?

The idea of retiring with a mortgage hanging over your head can be uncomfortable. After all, retirement is supposed to be about enjoying life, not worrying about the next loan repayment. 

The thing is, today's high home prices often mean bigger mortgages, which can take longer to pay off. At the same time, more Australians are buying their first home at an older age.

So, it's no surprise that 17% of recent retirees had a mortgage in 2023, up from 13% in 2003.

It's likely to become even more common for future generations. 

Vanguard found 48% of Gen Z Australians and 37% of Millennials expect to retire with a mortgage.

Of course, home loan repayments don't stop just because your regular pay does.  

However, there are strategies home owners can use to clear the mortgage sooner - or learn to live with the debt in retirement.  

Here are some options to weigh up. 

Option 1: Decide whether to pay off the mortgage or grow super 

For many people in their 60s, their mortgage may be relatively modest, particularly in relation to their other assets. 

KPMG found Baby Boomer households (that's the generation born between 1946 and 1964) have average debt of $160,000. On paper at least, that's a fraction of their average net worth (assets less liabilities) of about $2.4 million. 

I know this sounds like a lot, but it's an average, and very wealthy Boomers will bump up that figure. For instance, KPMG also found Boomer households own share portfolios worth $180,000 on average, which simply won't be the case for everyone.  

That said, home and property holdings average around $1.36 million among Boomer households, and I was pleased to see super and insurance reserves averaging $630,000. It's worth remembering these are household figures, rather than figures for individual Boomers.

The question is, should you focus on paying down the mortgage or adding more money to super? 

On one hand, knuckling down to pay off the debt ahead of retirement means you save the interest you would otherwise pay. It's like earning a risk-free return equal to your loan rate (by the way, the average variable home loan rate was around 6.2% before September's rate rise).   

The downside is that there are no tax breaks to paying off your loan sooner. Repayments typically come out of money that's been taxed at your marginal rate. 

By contrast, concessional contributions to super are generally taxed at just 15%, which beats most personal income tax rates. So, you can potentially get a lot more bang for your buck directing spare cash towards super. 

Better still, returns on super often outpace mortgage interest rates.  

Over the three years to 31 August 2026, balanced and growth investment options within super delivered average annual returns of 9.3% and 10.9% respectively, according to SuperRatings.

That's a fair bit higher than the 6% or so you could be paying on a home loan. The catch is that these past returns are no guide for what your super may earn in the future.  

Still, the basic idea is that your investments should earn more than your mortgage costs. So, if your super is returning, say, 8% annually, and you're paying 6% on your home loan, the numbers may favour growing your super rather than paying down your home loan.  

This logic doesn't address the feel-good factor of living debt-free.  

Fortunately, there may be a sweet spot.  

Keeping spare cash in an offset account linked to your home loan saves on loan interest. This can help pay down the loan sooner. And your money is usually available at call if you need it. The same principle applies to making extra repayments on a loan that offers redraw. 

Option 2: Downsize to clear the debt 

Selling your current home and buying something smaller and cheaper has the potential to eliminate a mortgage.  

It may also free up money for retirement.  

From age 55 you may be able to make a 'downsizer' super contribution worth up to $300,000 from the sale proceeds of a home if you've owned the place for at least 10 years. 

If you have a spouse or partner and you're both eligible, you may each be able to make a downsizer contribution. That can work out to an extra $600,000 in combined super savings.

However, downsizing is not a magic solution.  

It comes with costs including stamp duty, agent's selling fees, moving expenses and legal fees.  

If moving makes sense for your lifestyle as well as your finances, downsizing can be worth a look.  

But it doesn't suit everyone.  

Some retirees thrive on the fresh start. Others regret selling up.  

So, do think about it carefully even if the numbers stack up. 

Option 3: Work out if you can comfortably live with a mortgage in retirement 

If you're looking down the barrel of retirement, still with a mortgage in tow, you may have the option of cashing in part of your super to clear the loan and retire debt-free. 

This can provide peace of mind, though it may not always be the best financial move.  

Remember, your super has the potential to earn returns above your loan rate.  

These returns can compound over time and add to your super, even when you are drawing down money in retirement. 

Meanwhile, the 'real' - after-inflation - value of your loan will decline over time.  

This being the case, the issue can boil down to whether you can comfortably manage loan repayments on your retirement income and still have enough money for a decent lifestyle. 

Before making a decision, work out where you stand financially. Know how much is owing on the mortgage, the rate and regular repayments you're paying, and how many years are left on the loan. 

Then look at your expected retirement income. This could include super, the Age Pension if you're aged 67 or over, income from non-super investments and any part-time work. 

You may find that the mortgage payments are relatively manageable, or that the loan can be paid off in just a few years. 

What matters is that you stress-test your budget.  

Rate hikes could see your loan repayments rise.  

A fall in investment markets could impact your super savings. 

And it always pays to have wiggle room to meet unexpected expenses. 

Plan for what works for you 

There is no universal rule that says you must be mortgage-free on the day you retire. 

The important thing is to have a realistic plan for eliminating or managing the debt in retirement. 

Having a home loan in retirement may not be ideal, but with planning, it doesn't have to stand between you and a comfortable retirement.