Retiring with debt? Experts explain downsizing, using super for your mortgage, and pension eligibility

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This article is part of The Conversation's "Retirement" series, where experts explore issues like how much cash you need to retire, retiring with debt, the emotional effects of retiring and the benefits of seeking financial advice.

More Aussies now have a mortgage when they retire, increasing from 23% a decade ago.

Using your house as security to get a loan, which can be used to cover expenses like travel, medical bills and other costs.

G'day mate, what are the options for Aussies who've got debt that's still going when they retire?

Option 1: keeping the home and the debt.

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– Her super is over the $695,500 cap.

If Jackie takes $200,000 from her super and uses it to pay off the remaining mortgage balance, she'll save on interest and principal repayments for the next decade. She'll also reduce her assets that are subject to assessment by $200,000, which makes her eligible for a part pension.

While Jackie has less superannuation, she gets to receive a pension and gets all the benefits associated with being a pensioner.

Option 2: downsizing to clear the debt

Downsizing can wipe out any remaining debt, and can free up money for holidays, restaurants and the good life in retirement. It also makes it possible to move to a more age-friendly home or unit.

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This lets homeowners over 55 who've lived in their place for over ten years make a one-off payment of $300,000 (singles) and $600,000 (couples) into their super, using cash from the sale of their home.

You need to provide information about your financial situation, which could affect whether you're eligible for a pension or other government subsidies.

Have taken up this initiative. That raises the question of whether this option genuinely creates a genuine financial incentive for downsizing.

Think again of Jackie, the woman with a two million dollar home and two hundred thousand dollars in mortgage debt. Say she decides to sell her home and move to a smaller house close to family and friends. This will cost her around forty thousand dollars in selling and marketing fees, and stamp duty of about sixty-two thousand dollars on her new one point four million dollar apartment.

Downsizing has left her with $1.1 million in financial assets (after transaction costs), so Jackie doesn't qualify for the pension.

While she'll be able to live comfortably, this decision to downsize might not be as appealing as staying in the house.

The decision to sell and move has set her back by an extra $100,000 in transaction costs and impacting her pension.

So, people need to think carefully about downsizing. It can let people move closer to kids, grandkids, and the services they need – but these must be weighed up against the financial implications.

What about renters?

Paying market rent on a fixed income can be a real struggle, making renting a big challenge for retirees.

Women aged 55-64 and those over 65 are among the fastest-growing groups facing homelessness.

The good news is that a lot of profit and not-for-profit retirement communities offer rental options and discounted entry fees for people on a limited income (but there's usually a waiting list).

depending on their circumstances.

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across the country.

While a retirement village may not be the top choice for many retirees, they can offer an affordable place to live.

Making the best choice

Choosing a place to live as you head into retirement involves weighing up financial, emotional, and lifestyle factors.

Homeowners retiring with a mortgage face a decision: keep their home or scale back to reduce their debt burden.

Keeping the roof over your head and tapping into your super to pay off the outstanding debt improves your cash flow and lets you hold onto your largest asset.

Downsizing can help clear out debt and boost your superannuation balance, but it also incurs additional transaction fees, and you might end up with a reduced or no pension at all.

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Jemma Briscoe is the director of Aged Care Gurus, where she creates educational resources and software for professionals who provide advice on matters related to retirement.

Kathleen Walsh has no association with any organisation or company that would benefit from this article, nor does she have any financial interests or affiliations beyond her academic role.