You’ve made it. After years of paying down your home loan, building equity, and possibly implementing a smart debt recycling strategy along the way, you’ve reached a major financial milestone: your mortgage is either gone or nearly gone.
And now, a new kind of question emerges. It’s one that isn’t often talked about:
- Should you still be carrying investment debt now that the mortgage is paid off?
- Is debt recycling still useful once you retire, or should you wind it down?
- How does it interact with your superannuation, pension income, or estate planning?
This stage of life brings fewer obligations, but bigger decisions. The pressure may feel lower, but the stakes are often higher.
In this guide, Unconditional Finance explores how your post-mortgage debt strategy could evolve to suit this new chapter, whether you’re still working part-time, entering full retirement, or simply living mortgage-free.
Should You Keep Your Investment Loan After Paying Off the Mortgage?
If you’ve used debt recycling to grow an investment portfolio while shrinking your home loan, you’ve likely built up an investment loan. This is separate from your (now repaid) owner-occupied debt.
That investment loan is still in play. The ATO doesn’t require you to repay it when the mortgage ends. So the real question becomes: what’s the most purposeful way to use it going forward, especially if you’re considering debt recycling after retirement?
Three common paths borrowers take at this stage:
- Continue holding the investment loan and keep the portfolio growing in the background.
- Start gradually paying it down, using investment income or surplus cash.
- Pay it off completely, either through asset sales or savings, for simplicity and peace of mind.
None of these are “better” than the other. What matters is choosing based on how your income, investment goals, and personal comfort have shifted now that you’re in a different life phase.
Unsure which option makes the most sense for you? Speaking with a Sydney mortgage broker can help you compare your choices, taking into account your cash flow, lifestyle, and long-term plans.
Why Some Borrowers Continue Debt Recycling in Retirement
There’s a misconception that debt recycling must end the day your mortgage does, or that retirees shouldn’t carry any debt at all. But when structured cleanly, and used for income-producing investments, an investment loan in retirement can continue to serve a clear purpose.
Here’s how it can work:
- Interest may remain tax-deductible, provided the borrowed funds were used for generating income (like shares or property).
- Dividends or rental income may offset the interest costs, making the strategy largely self-sustaining.
- Franking credits can reduce your tax liability further, especially if your taxable income is lower in retirement.
- The investment portfolio can continue to compound, with no pressure to liquidate assets prematurely. This can be particularly helpful in low-interest environments, or if you’re drawing a pension that just covers your baseline expenses.
This approach appeals to retirees who want their assets to “keep working” quietly in the background, while they enjoy flexibility and freedom without feeling the need to micromanage.
For those who’ve built a strong portfolio, a debt recycling strategy for retirees can still provide meaningful tax and income benefits.
“But I Don’t Want Debt in Retirement” – Understanding and Respecting the Emotional Pivot
Even if the numbers support keeping your investment loan, the emotional side of retirement debt strategy can’t be ignored.
For many Australians, debt in any form feels like a burden, even if it’s tax-deductible or backed by solid investments. The shift from “growth mindset” to “security mindset” is natural. What once felt like a calculated risk may now feel like an unwanted variable.
If this is you, know that it’s completely valid.
But also know: you’re not stuck. You can wind down gradually. Or restructure things so the strategy continues working in a way that respects your new risk tolerance.
The goal isn’t to stay “on strategy.”
The goal is to stay in alignment with your values, comfort, and evolving lifestyle.
Keep, Restructure or Close Your Investment Loan?
By now, you’ve likely built more than just equity. You’ve built perspective. You’re less focused on chasing returns, and more focused on outcomes that feel sustainable.
So here’s a more nuanced look at what to assess, beyond the basics:
1. Your Marginal Tax Position
In retirement, your taxable income may decrease. This reduces the value of interest deductions, but not necessarily to zero. If your income is drawn from superannuation (which may be tax-free), but you still have income from investments or trusts, those interest deductions may still offer value. It’s worth doing a side-by-side comparison with your accountant.
2. The True Cost of Holding the Loan
Don’t just look at repayments. Look at:
- Net interest cost after tax
- Income generated from the investments funded by the loan
- Opportunity cost of using your cash or pension to pay it off
- Think about the admin burden. How easy is your current setup to manage?
Sometimes, simplifying can free up headspace. But in other cases, it might cost you more in taxes or lost investment income.
3. Your Long-Term Investment Purpose
Do you plan to pass on your portfolio to children or grandchildren? Keep it intact for longer income generation? Sell it down in stages?
This affects whether it makes sense to deleverage now, or stay invested and exit slowly.
Wondering if your current structure still fits? It might be worth reviewing your setup with a broker who understands retirement-stage strategies.
Debt Recycling with Super or Pension Income
This is where it gets interesting.
While you can’t “debt recycle” within your super fund, your personal investment structure can work in tandem with your SMSF, defined benefit income stream, or Account-Based Pension.
Here’s how they can complement each other:
- You can delay or reduce super withdrawals by drawing part of your income from dividends instead. This helps preserve your super balance for longer.
- Franking credits from share income may be especially valuable in retirement, when your marginal tax rate is lower (or zero).
- Investment loan interest deductions may offset taxable income from other sources. These could include rental properties, trust distributions, or part-time business income.
And if you’re receiving a part Age Pension? That can also influence whether keeping an investment loan in retirement makes sense. Assets and income are assessed differently under the assets and income test. A mortgage broker familiar with retirement structures can flag whether your loan could be reshaped to improve your position.
When to Wind Down Debt Recycling
Debt recycling doesn’t have to be a forever plan. Like most financial strategies, its effectiveness evolves with your needs.
Here’s when clients often choose to step back:
- You’re no longer gaining meaningful tax benefits
- The loan is small relative to the asset base and causing more admin than it’s worth
- You want to reduce estate complexity or simplify finances for a partner or family
- You’re planning a significant life shift, such as aged care, downsizing, or moving assets into a trust.
In these cases, winding down doesn’t mean losing everything you’ve built. It simply means transitioning out in a way that’s structured, measured, and aligned with your financial rhythm.
How to Exit Debt Recycling Without Losing Momentum
A strategic wind-down might involve:
- Redirecting investment income toward the loan balance
- Paying off the loan in stages using surplus cash or pension drawdowns
- Selling assets across financial years to spread CGT liabilities
- Reviewing your lender, as some make it easier to close down splits or refinance into a single, clean facility
- Working with your accountant to maintain ATO compliance throughout the transition
The loan purpose must remain clear during this time. So avoid drawing investment funds into personal accounts or mixing loan use. Your broker and accountant should ideally work together here to keep your documentation strong and your structure audit-safe.
A Real-World Retirement Scenario: Margot, 68
Margot is fully retired and living off her SMSF. She has a $150,000 investment loan and a portfolio of blue-chip Australian shares. These generate $12,000 in annual dividends, fully franked.
After reviewing her position, she decides to stop reborrowing, but keep the loan for a few more years while she uses dividends to cover the interest. This lets her access franking credits, avoid selling during volatile markets, and gradually simplify her estate.
Her broker helped her consolidate her split loans into one clean facility. They also automated repayments from the investment account and scheduled a full exit in five years, aligned with her cash flow plan.
No drama. Just smart phasing out.
Refine Your Strategy Without Reinventing Everything
By the time you’re mortgage-free or semi-retired, you’re not looking for radical reinvention. You’re looking for alignment.
Debt recycling doesn’t have to be something you “commit to” or “quit.” It can be something you adapt. Keep what serves you, and let go of what no longer fits.
Whether that means continuing the investment loan with subtle refinements, or designing a smooth exit that supports your goals, the most powerful thing you can do now is make the next step intentional.
If you’re ready to make your next move with confidence, now’s a great time to explore what an adapted strategy could look like for you.
Frequently Asked Questions (FAQs)
It depends on your tax position and how the loan supports your overall income strategy. For some retirees, interest on the investment loan may still be tax-deductible if it’s linked to income-generating assets, and franking credits can potentially reduce tax further.
However, if your taxable income is low or the admin feels like more effort than it’s worth, it might be time to reassess. It’s worth sitting down with your broker and accountant to model both scenarios: keeping the loan versus paying it down. That way, you can see what suits your stage of life.
Selling your home won’t automatically close your investment loan, especially if it’s a separate split. If the home is unencumbered but the investment loan remains, you’ll need to ensure you maintain a clean paper trail for the ATO.
Some retirees choose to keep their investments intact and just adjust how they manage repayments from their new residence or sale proceeds. A broker can help you restructure the loan if needed, especially if you want to consolidate or simplify post-downsizing.
It might. Centrelink assesses both assets and income when determining pension eligibility. The loan itself isn’t directly deductible against your assessable assets unless it’s secured against the investment asset (and even then, only under certain conditions).
This means the value of your investments could still be counted in full. If you’re close to the asset or income thresholds, it’s wise to get advice before making changes. Some borrowers find that repaying part of the loan or altering how income flows can make a difference.
Great question. If you’re no longer reborrowing but still claiming deductions, the ATO expects you to maintain a clear link between the loan and the income-generating asset. That means not mixing the funds with personal use, avoiding redraw for non-investment purposes, and keeping loan splits clean.
Even if you’re winding down the strategy, the documentation and purpose tracing still matter. Your broker and accountant can help review whether your current setup remains compliant or if small tweaks are needed.
Absolutely. Many Australians in your position choose to phase out their strategy over time. This might involve directing dividends toward the loan balance, topping up repayments with surplus income, or selling assets slowly across multiple financial years to manage CGT.
You don’t need to close everything in one hit. A gradual exit can give you flexibility, preserve tax outcomes, and let you simplify at your own pace. It’s all about finding a balance that still feels safe. That’s where a personalised review can really help.
