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Retiring debt-free may not be the best strategy

Conventional wisdom would have it that workers should retire debt free. But that may not always be the best way to go. What if retirees could hang on to debt to their advantage?

If the majority of your wealth is tied up in the family home, clearing a mortgage locks that equity up in retirement. Re-borrowing against the home is almost impossible without steady income. And unless you sell and downsize, a reverse mortgage is really the only alternative if accessing equity is required.

And it turns out that more Australians are exploring reverse mortgages to ease cash flow pressures in retirement. Surveys report that with more retirees concerned about income, enquiries and demand for reverse mortgages are growing.

However, the reverse mortgage market is complex and somewhat of a minefield, and can be overwhelming for those retirees considering going down that path.

Features, rules, and restrictions vary considerably among reverse mortgage products. Interest rates are typically higher than standard mortgage rates, and establishment, valuation, legal, and ongoing fees all add up. Early repayment of capital may be restricted or penalised, with overall flexibility in short supply. There may be additional insurance and property maintenance requirements. And the whole process can be confusing and unsettling.

An alternative strategy

Instead, by not wiping out a mortgage on the family home prior to retiring, a ‘line of credit’ can be set up to access equity and manage cashflow when retired.

Specifically before retiring, funnel as much savings as possible into an existing home loan with full redraw facility. Ideally the net loan balance will be close to zero by retirement. If no home loan exists prior to retiring, it may be possible to establish one while there is still income and capacity to service one. Then pay it down to build redraw.

The benefits of having an open loan facility in place to draw upon in retirement include:

1. Flexibility.

  • Ability to fund one-off type expenses such as medical, home repairs, a car, or even travel.

2. Bridging income.

  • Can provide income in early retirement before super becomes accessible, or until Age Pension entitlement.

3. Volatility Buffer.

  • Enables super balances to ride out market volatility. Funds can remain invested in growth assets without needing to lock in losses in market downturns, by drawing on loan funds for income instead.

4. Bank of Mum and Dad.

  • A means of being able to assist your adult children.

5. A ‘DIY reverse mortgage’.

  • Supplement super fund pensions and/or the Age Pension, in a controlled and measured way on one’s own terms.
  • Decide how much to access and when, controlling your home equity. Interest on funds drawn is paid at a competitive owner-occupied rate, and money can be repaid simply at any time.
  • Avoids the pitfalls and complexities of a commercial reverse mortgage.

Note, that a redraw facility can be restrictive and controlled, and is best suited for lump sum type withdrawals. A mortgage offset account could therefore be another means to access home equity, offering maximum liquidity if regular cashflow is required.

Bear in mind though, that an offset account is basically a savings account linked to a home loan, and is therefore treated as a financial asset for Centrelink purposes. A redraw facility, however, allows access to funds already used to pay down a mortgage, and is exempt from the Age Pension assets test.

If preserving Age Pension entitlement is required with regular cashflow, then a combination offset/redraw approach could be considered. By topping up the offset balance with redraw lump sums at defined intervals, entitlement effects can be kept to a minimum.

It needs proper planning

Maintaining debt in retirement is not without risks and considerations. A redraw facility is not guaranteed, and lender rules can change. If the Age Pension isn’t an issue, the process can be simplified by just running an offset account. But ensure the mortgage can be 100% offset as that is not always the case and note that offset accounts are usually not available with fixed interest loans.

As seen in recent times, interest rates can rise rapidly, and without an offsetting increase in property value, equity can be eaten into faster than expected. And discipline is key, as easy access to redraw and offset accounts can tempt excessive spending. And there may be implications for estate planning, as equity could reduce for beneficiaries. As with any financial decision, proper risk/benefit analysis should be undertaken before entering into a particular arrangement.

Finally, if using debt to mimic a reverse mortgage, an exit strategy should be considered before commencement. A 'DIY reverse mortgage' can work well for early to mid-retirement years. But unlike a commercial reverse mortgage which is a lifetime arrangement, redraw/offset facilities are tied to a standard mortgage which has a defined term to expiry. It must be repaid eventually. At which point super and Age Pension cashflow needs to be sufficient, or assets sold either to downsize or move into aged care. Or transition to a reverse mortgage, having at least deferred this option, with interest savings and hopefully an increase in property value along the way.

Having flexibility in retirement is key and knowing that debt managed prudently is not necessarily a bad thing, it can provide another option for income. So that perhaps the pre-retirement mantra should shift from: “retire debt free” to “retire with flexible access to funds”.

 

Tony Dillon is a freelance writer and former actuary.

 

15 Comments
Dean
October 05, 2025

I may be missing something here, but surely the biggest issue with maintaining a traditional mortgage in retirement is the cashflow required for loan repayments? Even if you have redraw balance that nets off the loan balance to zero, you still need to make regular loan repayments based on the gross balance. Sure, you could potentially fund the repayments with a superannuation arbitrage strategy as mentioned by others, but that is not going to be worthwhile or appropriate for most people.

The primary reason retirees clear their mortgage, and banks don't lend to retirees, is because of the cashflow impact of loan repayments. A reverse mortgage is completely different, because there are no ongoing repayments required - just a lump sum at the end.

Tony Dillon
October 05, 2025

Dean, the assumption is you go into retirement with close to, or at, net zero debt. That is, offset account balance basically equals the loan balance. When a loan repayment is due, it comes out of the offset account. The result being the loan balance and offset account reduce by the same amount, net loan amount unchanged. Apology if that wasn't clear in the article.

Dean
October 06, 2025

Thanks Tony, yes that is clearer.

However it only obviates the need for addditional cashflow for repayments, while the offset/redraw balance is not being accessed for other purposes. This would seem to defeat the purpose of having it? If the offset is withdrawn to help kids buy a home for example, the retired parents will need to find additional cashflow to make the repayments (which will then include interest) at a time when they're no longer receiving employment income. A genuine reverse mortgage would not have any cashflow impact.

Tony Dillon
October 08, 2025

Dean, this is all about having flexibility and options that a line of credit brings. Different people will use it in different ways, or maybe not even at all, but it's there because you never know. Even with the 'helping the kids buy a home' scenario. The loan may be temporary, a bank loan top-up maybe, where they pay the interest on the offset drawn. A car loan perhaps? The possibilities are endless really.

Lyn
September 22, 2025

Another benefit retaining loan (if not change banks) is maybe no loan application fees if times change eg. moving. Only been charged transfer fee/ registration mortgage, moved 3 x in 35yrs, 1 fee 40yrs ago. If reason is balance for 35yrs at mostly $10 to keep active, don't know, accepted gratefully. Change to interest - only when low interest, no fee. Diminishing principal meant less for purpose, applied to restore, no fee. No fees for 5 changes. Added bonus last time, bank valuation at its' expense as hadn't for 25 yrs. Updating Will at time, assisted re proportions of bequests instead of stab in dark as able to speak to valuer inspecting.
It gave method to acquire portfolio in downturns, for independent retirement. Great believer in enforced saving via loan any age & creates an interest to keep brain oiled, perhaps a hidden benefit for some.

Darmah
September 19, 2025

When I retired and finally payed off our home loan, I asked for the return of our deeds only to find the bank was still listed as an “interested party” after asking why, I was told it was normal practice and meant we could still use a redraw facility or our offset account in retirement.
Surely borrowing funds without an income to repay it, would be a mistake.
I asked my solicitor what legal implications of this would be and was told we would still have to have the banks permission to borrow, sell or do anything.
His recommendation was to push to have their name removed and own the house outright.
It took a while but they eventually released the deeds in our name only.
It pays to check the wording on you Title Deeds.

Food for thought if your intention is to use one of these facilities to fund your retirement, and as they are only available with variable rate loans, could spell trouble if rates go up a lot.

Also, you’ve not mentioned the Govt. Home Equity Access Scheme, much cheaper than a commercial reverse mortgage, no ongoing fees, no negative equity clause, spouse or caregivers can stay in the home after one of them dies and not counted as an asset or income for the Age Pension, anybody over the age of 67 can apply, not just pensioners.
You can receive fortnightly payments or lump sums or a combination of both with no “early payback” penalty’s.

It’s major disadvantage over commercial products appears to be dealing with Centrelink and the slow processing times (six months plus is not uncommon)
So unless you are one of the small number of older retirees who urgently need a nursing home, you can fund a comfortable retirement and age in your own home as it (hopefully) increases in value.
And no bank interference.

Dave
September 18, 2025

This takes us to a trade-off about risk-adjusted income, and the higher interest rates get, the more favourable it becomes to repay your mortgage.

Taking Noel's example of an investor with $800,000 in super and $300,000 owing on their mortgage (assuming funds paid onto the mortgage can be redrawn so we don't have to deal with a loss of utility question). If their super fund is returning 8% (really 7.5%, net of tax if in accumulation), and the debt on their property is costing 5.5%, then it's reasonable to retain their debt and draw from super to cover the interest.

However, if interest rates climbed and their super fund was still returning 8% gross, but the debt on their property is now costing 6.5%, then the client is considering EITHER retaining the debt and the risk (that 8% on their super probably varies in a range of -5% to +15%), OR draw from super to pay down the debt. If drawing down on super to pay off debt, they give up 8% (really, 7.5% after tax) with market risk, and gain a risk-free, tax-free 6.5% in the form of interest they are no longer paying. They may also pick up a meaningful increase in their age pension as the money paid onto that mortgage has effectively disappeared from Centrelink's assessment. Paying down the mortgage is suddenly starting to look pretty good.

Regardless, keeping the debt facility open for access to funds is generally a good idea. You can keep a cash reserve of your own (perhaps equal to a year or two of living costs), or you maintain access to someone else's cash and rent it when you need to, so yours can stay more fully invested.

Lisa
September 18, 2025

Just make sure that you have a think about how you might fund a nursing home RAD, especially if you are part of a couple. In my area they are about $700,000 or else you need to pay up instead at a high interest rate. No point spending on lifestyle or giving it away to the kids to then find that there are no beds available in your area (or only very undesirable ones) for those who can't fund a RAD.

Noel Whittaker
September 18, 2025

I think a bigger issue is what to do if you have a debt and substantial superannuation when you retire. Let's imagine you are 65 with $800,000 in super and $300,000 owing on your mortgage. Let's assume your fund is returning 8% and your mortgage rate is 5.5%. I suggest you're better off to keep the mortgage and take out enough each year to pay the interest—knowing that you can always withdraw the money from superannuation tax-free when you need to.

Mark Hayden
September 19, 2025

That is a good Case Study - $800k Super (8%pa) and $300k Debt (5.5%pa) and nominating annual drawdowns to pay the interest. A consideration is the Sequencing Risk. Also it depends on the asset mix in Super, eg if part of the Super is in Cash & Term Deposits, then that part generates a lower return than the Debt, so should some or all of that be cashed?

David
September 22, 2025

Sounds great. I think the Centrelink aspects of this scenario would mean that the extra Age Pension would equate to a return of 7.8% plus interest saved 13.3%. The Centrelink home equity access scheme is a good option to consider in later years as savings dwindle.

John De Ravin
September 22, 2025

David I think the point you make about Asset Testing of the Age Pension is a critical one for affected retirees. If a retiree is not, and never will be impacted by the Assets Test, I can see a clearly arguable case for maintaining the super balance and using the super returns to pay the mortgage at the lower interest rate. But as soon as someone is affected by the Assets Test, the opposite answer (pull money out of super to pay down the mortgage) seems fairly clear cut. It might still be helpful if possible to maintain redraw options to facilitate cash flow flexibility in line with Tony’a article, especially if the cash flow needs are temporary and will be reimbursed; you can’t pay withdrawn money back into super after age 75.

Dudley
September 18, 2025


Variable rates on reverse mortgages are around 9 to 10% / y.

In what circumstances would a reverse mortgage be best?

Plan / expect to die at home with $nought at a 'ripe old age'?

Luke
September 18, 2025

Who said it was a reverse mortgage?

Dudley
September 18, 2025


Reverse mort-gage better than revamped fixed term mort-gage:
Can not be evicted from home under reverse mort-gage.

Stop maintenance, spend gaily, acquire euthanising apparatus, die with $nought at home.

Doubtless providers have protected themselves against self immolating arsonists through limits on withdrawals.

 

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