A retiree’s dilemma: Pay off the mortgage or preserve super?

In an environment of rising housing costs, more Australians are entering retirement before their home mortgage is fully repaid. This leads to the question of how a retiree should approach housing debt.

The 2024 How Australia Retires report by Vanguard found that 32% of its Generation X survey respondents expect to retire with a mortgage, with 38% of those planning to keep making mortgage payments after leaving work, 18% planning to sell their home, and 25% planning to use superannuation to repay the debt.

So which strategy is best?

We’ll cover what to consider when choosing whether to keep money in super or use it to pay off the mortgage and how selling your home could be a viable alternative.

Mortgage vs super

A fully paid mortgage offers the security of lower housing costs, but could keeping money in super instead leave retirees better off financially?

The answer depends on mortgage interest rates, superannuation investment growth, and Centrelink entitlements. The following discussion and examples assume retirees use a simple account-based pension (the most common type of super product for retirement).

If a superannuation investment can be expected to grow at a higher rate than a mortgage debt, keeping the balance rather than using it to pay down the debt may be a viable strategy.

For example, the five-year average standard variable mortgage interest rate was 4.06% to June 2024, while the average return for a growth option (61–80% growth assets) in a super pension was 7% over the same period. A retiree who kept their super investment in a growth option during that time rather than paying down their debt managed to earn approximately 3% more on their investment than they paid in mortgage interest.

The difficulty is uncertainty. Shy of access to a time machine, there is no way to predict whether an investment will generate a higher return than the interest charged on a mortgage.

In addition, retirees often choose more conservatively invested options for their super that have lower long-term returns but offer less variability from year to year. For this reason alone, many will prefer to repay the debt, accepting the risk that super returns may have left them better off in exchange for the peace of mind that comes with a fully paid off home.

If a retiree does choose to keep their mortgage but later changes their mind, they are generally able to withdraw a lump sum from super at any time to repay the debt. However, some retirement income products restrict access to lump sums, so it is critical to understand the features of the product that is selected.

Importantly, the potential gap in mortgage rates and investment returns is not the only consideration for many retirees.

A person who is likely to be eligible for the Age Pension must work through the impact that repaying their mortgage could have on their entitlements.

The home is not assessed in Centrelink’s means tests and an outstanding home mortgage can’t be used to reduce the value of assets that are assessable. This means repaying mortgage debt reduces the amount counted in means testing and can improve the rate of Age Pension that is payable.

Examples: Mortgage and Age Pension

Couple above the assets test threshold

Jock and Phillippa have retired. They are both 68 and have $100,000 remaining in home mortgage and $600,000 (combined) in super as well as $30,000 in other assets (the second-hand value of their car and home contents).

If they choose to keep their mortgage, they will have $630,000 in assessable assets for the Age Pension means test and their Age Pension will be $32,375 in the first year.

If they instead choose to cash $100,000 from super and repay the mortgage, their assessable assets reduce to $530,000 and their Age Pension will be $40,175, an increase of $7,800.

To generate an equivalent benefit, the investment earnings on their super would need to be 7.8% higher than their mortgage interest rate. Jock and Phillipa know that is very unlikely, so they choose to repay their mortgage.

Single below the assets test threshold

Sione is 70 and has just retired. He has a mortgage of $80,000 outstanding and a super balance of $270,000 plus other assets worth $20,000.

Because his total assets are below the assets test threshold for a single homeowner ($314,000 in 2024–25), Sione will receive the full rate of the Age Pension. Choosing to repay the mortgage will not increase the rate of the Age Pension that he is entitled to.

Sione can choose whether to repay the mortgage with his super or continue making repayments based on whether he expects the return on his superannuation investments to be higher than his mortgage interest rate or not, keeping in mind how comfortable he is with holding debt in his retirement.

Calculations by author using SuperGuide’s Age Pension calculator based on Age Pension rates and thresholds current on 2 March 2025.

Selling the home

If neither using super to repay debt or continuing to hold a mortgage while retired is appealing, a home sale could be an option.

Renting in retirement is undesirable for most people because of cost, insecurity (rent increases and having to move at short notice), and how renters are assessed in Age Pension means tests.

If renting is off the table, selling the home at retirement to repay the mortgage will mean purchasing a home with the net sale proceeds to live as a debt-free homeowner.

The benefit of paying off the mortgage without spending super to do it is clear; more money available to generate your income for retirement, giving you a better lifestyle, helping your savings last longer, or both.

Perhaps this will mean a seachange or treechange away from our bigger cities to find more affordable housing, or simply a move to a smaller property. Some may find the option of a granny flat arrangement appealing since it solves the problem of finding a property and allows families to stay close together at the same time.

If the sale of your home is likely, be sure to consider transaction costs such as real estate agent fees and stamp duty.

The bottom line

Retiring with a mortgage doesn’t have to spell disaster for your post-work life, but careful attention is required to follow the path that most suits you. Be sure to consider whether growth in your super account is likely to outweigh mortgage interest, if repaying the mortgage could improve your Age Pension, and if selling your home could be a viable alternative.

A decision like this can be difficult to make alone, particularly if you’re considering a more complex option, such as a granny flat. So, be sure to seek help from a licensed financial adviser for personal recommendations if required.