Should I pay off my loans before I retire? The answer changes with the stage you are at. Owning your home without debt is a real achievement. While you are still building, it is not always the first goal: debt is a tool, and inflation devalues your borrowings as well as your savings. As retirement comes closer, the same debt becomes a cost your retirement income has to carry.
Why debt feels different in retirement
A loan that felt light with two wages behind it feels heavy when the rent is the only thing paying it. Whatever the rent does not cover comes out of the money you live on. I have sat with people who reached retirement on interest-only loans with no plan to reduce them.
Which loan goes first
Debt on the home you live in usually costs the most after tax, because its interest is not deductible. Debt on an investment property is deductible while the property earns income. That is why the home loan tends to go first. Among investment loans, the order often follows which property you plan to keep for income.
Ways the debt comes down
- Extra repayments in the working years, or principal and interest repayments in place of interest only.
- Selling one property and using the proceeds to clear loans on the others.
- Money in an offset account against a loan, which lowers the interest while keeping the cash at hand.
- Money from super once it can be released, with its own tax and pension effects.
A couple at 58 have three investment properties, all interest only, and plan to stop work at 65. Left alone, most of their rent at 65 goes to interest. Switching two loans to principal and interest over seven years costs them more each week. It also means that at 65 two properties are close to clear and paying them an income. Seven years is enough time to do it gradually. Two years would not be.
The trade-offs
Paying down debt lowers your interest and lifts your income, but it ties up money you cannot easily get back. Paying down an investment loan raises the property’s assessed net value in the Age Pension assets test. Selling to clear debt brings capital gains tax and costs; the 2027 rules are in Holding or selling down. Each route has a price, and the question is which price suits you.
Debt that suits the building years needs a plan for when the building stops. The earlier that plan starts, the more choices it leaves you.
To see which loan to clear first, with your pension and tax included, book a first conversation. It costs nothing.
Nicholas Lockhart