Should You Pay Off Your Mortgage When You Retire?

Why the answer may surprise you — and how to avoid running out of money later in life.

As retirement approaches, many Australians face a critical financial crossroads: “Should I pay off my mortgage or keep the loan and invest the extra cash?”

It seems like a no-brainer to be debt-free, right? But when it comes to retirement planning, the answer isn’t always straightforward. Paying off your home loan could, counterintuitively, increase your financial risk in retirement.

Let’s break it down.

MoneySmart – Paying off your mortgage 👉 https://moneysmart.gov.au/managing-debt/paying-off-your-mortgage

🧮 The Math vs. The Mindset

More than 45% of Australians aged 65 to 79 still have a mortgage or housing debt, according to data from the Australian Bureau of Statistics (ABS). This number has risen significantly over the past two decades, driven by rising home prices and delayed homeownership.

On one hand, there’s the emotional satisfaction of owning your home outright — no repayments, no bank letters, and no stress if interest rates spike. But on the other hand, tapping into savings to eliminate your mortgage might reduce your cash reserves, limit your investment options, and hurt your long-term financial flexibility.

💡 Consider These 5 Key Factors

1. Cash Flow

Once you’ve used your super or savings to pay off the mortgage, that money is gone. Withdrawing from a low-interest savings account to cover living expenses and emergencies isn’t ideal — especially if you’re no longer earning and markets are volatile.

Australia-specific tip: If you’re receiving a part Age Pension, holding more of your wealth in your principal residence (which is exempt from the asset test) can be a strategic move. However, if you pay down a mortgage and reduce your accessible cash, it may leave you unable to weather financial shocks.

2. Tax Efficiency

Withdrawing lump sums from super to eliminate a mortgage could trigger tax consequences, especially if you’re under age 60 or haven’t met a condition of release. Plus, taking money out of investments or super to pay off debt could lead to capital gains tax or reduce your tax-free earnings within super.

3. Investment Opportunity Cost

In a low-interest environment, paying off a 3% mortgage by sacrificing investments earning 6–8% might not be smart. Over time, invested funds could significantly outperform the interest saved.

As one Australian financial adviser puts it:

“Debt-free is not always better — flexibility and liquidity are what retirees need most.”

4. Psychological Peace

There’s real peace of mind in knowing your home is 100% yours. Many retirees feel emotionally more secure and less anxious once the mortgage is paid off.

However, this must be weighed against the very real financial risk of having fewer liquid assets to draw upon later in retirement. Retirees who lock up all their capital in a home may find it harder to access funds without selling or refinancing.

5. Plan for the ‘What Ifs’

Whether you plan to sell and downsize, rent out part of your home, or age in place, your mortgage strategy should align with your broader retirement plan. Think about:

• Longevity (will your savings last 25–30 years?)
• Health care needs
• Centrelink eligibility
• Inflation protection

ASFA – How much super do you need to retire? 👉 https://www.superannuation.asn.au/resources/retirement-standard

✅ When It Might Make Sense to Pay It Off

• You have high-interest debt (like credit cards) — pay these first.
• Your mortgage interest rate is >6% and unlikely to be offset by returns elsewhere.
• You value emotional peace of mind over investment returns.
• You don’t need liquidity from that cash for other goals.

❌ When Keeping the Mortgage May Be Smarter

• You have a fixed low-rate mortgage and can invest the surplus for higher returns.
• You need cash reserves for emergencies, aged care, or lifestyle upgrades.
• You’re receiving the Age Pension and want to maximise your exempt home equity.
• You may want to gift money to family, travel, or start a legacy project.

Final Word – Balance Is Key

Retirement isn’t just about being debt-free — it’s about being financially flexible. A well-structured strategy might involve holding a small, manageable mortgage while allowing your super, shares, or ETFs to continue growing.

Want help deciding what’s right for you? Speak with a financial planner who understands the trade-offs, especially within Australia’s superannuation and tax system.

CoreLogic – Mortgage Trends for Older Australians 👉 https://www.corelogic.com.au/news-research

📢 Ready to retire smarter?

Book a free clarity call with an Inspired Money adviser and get personalised advice on your mortgage, cash flow, and future.