How and When to Start De‑Gearing Your Investment Property Loans

A sensible de‑gearing plan is the missing piece in many Australian property strategies. De‑gearing simply means gradually reducing your investment debt and risk so that, by the time you want to work less (or stop), your loans are at a level your retirement income can comfortably support.

For most investors, you don’t wait until you retire to start. You usually begin 5–10 years out from your target retirement – or earlier if cashflow is tight, rates rise or tax rules (like the 2026–27 negative gearing changes) make high leverage less attractive.

This guide gives you clear triggers, numbers and a one‑week action plan to decide whether it’s time to start paying down your investment loans.

De-gearing is a gradual shift from growth to preservation, not an abrupt stop.

1. What “de‑gearing” really means (and why it matters now)

De‑gearing is the deliberate, staged process of lowering your loan‑to‑value ratios (LVRs) and softening your cashflow risk. It’s not usually “sell everything and go to cash”.

In practice, de‑gearing might include:

• Redirecting surplus cash to investment loan offsets
• Converting some interest‑only loans to principal & interest (P&I)
• Paying down non‑deductible home debt before investment loans
• Selling one underperforming property to reduce overall debt
• Restructuring loans so riskier debts sit against stronger assets

This matters more after the 2026–27 tax reforms, because:

1. Negative gearing on most established properties bought after 12 May 2026 can’t be used against wages – rental losses become a true cash cost, not a tax strategy.
2. Capital gains are taxed more heavily for many investors, so relying purely on capital growth while staying highly geared is less attractive.
3. Rates have been volatile, and the RBA has made clear that longer‑term inflation risks are not going away.

If your whole strategy assumes “the tax office and low interest rates will always bail me out”, it’s time to rethink.

For a grounding in how gearing works in the new rules, see Plain-English Gearing Basics Every Australian Property Investor Must Know.

2. The core question: What are you optimising for now?

2.1 Accumulation vs preservation

Your de‑gearing timing comes down to one honest question:

Am I still in growth mode, or am I now in preservation/income mode?

If you’re:

• In your 30s–40s
• Income rising strongly
• Comfortable with some volatility

…you’re often still in accumulation mode. Higher gearing can make sense if you’ve stress‑tested it properly and have buffers.

If you’re:

• In your 50s–60s
• Wanting to work less or retire within 5–10 years
• Feeling more uncomfortable with debt and volatility

…you’re moving into preservation/income mode. That’s when de‑gearing becomes a core strategy, not an afterthought.

2.2 Your “sleep‑at‑night” test

Ask yourself and your partner:

• If rates rose another 1–2% from here, how would I feel?
• If one property sat vacant for 6 months, could we handle it?
• If my business income dropped 20%, would we still be okay?

If your honest answers make you uneasy, that’s a strong signal you’ve hit your personal risk ceiling and should start de‑gearing – regardless of your age.

For self‑employed and high‑income investors, this question is especially important given the new tax settings. The guide on property strategy for self‑employed and high‑income investors after tax shifts walks through this in more detail.

3. Clear triggers that it’s time to start de‑gearing

There’s no magic age. Instead, look for these concrete triggers.

3.1 Time‑based triggers

• 10+ years from retirement: usually fine to stay geared if cashflow is strong and buffers are solid.
• 5–10 years from retirement: this is the prime window to start de‑gearing. You have time to:
  • Let compounding growth keep working
  • Pay down debt meaningfully
  • Rebalance without fire‑sales
• 0–5 years from retirement: you want a very clear endgame already in motion. If not, you may need sharper moves (e.g. selling one property) rather than gentle tweaks.

3.2 Cashflow triggers

You should strongly consider de‑gearing if any of these are true:

• Your household budget is tight even at current rates
• You’d struggle if your loans rolled off fixed rates
• You rely on ATO refunds from negative gearing to make things “work”
• You have less than 3 months of total loan repayments sitting in offset buffers (across home and investment debt)

Remember: from 1 July 2027, for many post‑2026 established properties, you can’t offset rental losses against wages. Those cash refunds you’ve been counting on may simply disappear.

3.3 Risk and life‑event triggers

De‑gearing jumps up the priority list when:

• One partner wants to stop work or scale back
• You’re heading into a business sale, redundancy or parental leave
• Health issues or caring responsibilities appear
• Lenders are already nervous about your servicing

Any of these is a cue to shore up your balance sheet.

4. How to think about de‑gearing by age and stage

Everyone’s different, but this framework helps you sanity‑check your plan.

4.1 30s to early 40s – build, but don’t be reckless

Usually still in growth mode:

• Higher gearing (70–90% LVR across the portfolio) can be okay if you:
  • Have stable or rising income
  • Maintain solid buffers
  • Use flexible loan structures (standalone loans, splits, offsets)
• Focus on:
  • Eliminating non‑deductible home debt faster
  • Setting up structure now so future de‑gearing is easier

Here, your main “de‑gearing” is often just aggressively smashing your home loan while keeping investment debt interest‑only with offset buffers, or using disciplined debt recycling. The guide on debt recycling and smart loan structuring explains how to do that safely.

4.2 Late 40s to mid‑50s – pre‑retirement runway

This is where many investors should shift gears:

• Consider capping portfolio LVR (e.g. aim to be under 60–65% by retirement)
• Start redirecting surplus cash from lifestyle upgrades to actual debt reduction
• Move some loans from interest‑only to P&I, especially on weaker assets
• Tighten your stress‑testing: model rates 2–3% above current

If you’re still chasing maximum leverage in this stage without a clear exit strategy, you’re taking on risk your future self may not thank you for.

4.3 Late 50s and 60s – simplifying and locking in income

At this stage, higher gearing only makes sense if you have very strong, diversified income and a high risk tolerance.

For most households:

• Aim for conservative LVRs (often 40–60% or less) by the time super and pensions are your main income sources
• Consider:
  • Selling at least one lower‑yield or higher‑maintenance property
  • Using proceeds to pay down remaining loans and boost super
  • Converting remaining loans to P&I with clear repayment timelines

The companion guide Smart moves for pre‑retiree property investors under new tax rules steps through those choices in more depth.

Tracking LVR and cash buffers helps decide when to start reducing debt.

5. The numbers: how to know if your leverage is too high

5.1 Portfolio LVR and “stress LVR”

Two simple ratios give you a quick sense check.

1. Current Portfolio LVR

Total loans ÷ total current property values

2. Stress LVR – what happens if prices fall 20%?

Total loans ÷ (total current property values × 0.8)

Example:

• 3 properties worth $2.7m total
• Total loans $1.9m

Current LVR = $1.9m ÷ $2.7m ≈ 70%
Stress LVR (prices down 20%): $1.9m ÷ ($2.7m × 0.8) ≈ 88%

A 70% headline LVR looks fine. But an 88% stress LVR says a decent downturn could leave you with very thin equity and limited options. If that makes you uncomfortable, it’s de‑gearing time.

5.2 Cashflow buffers and repayment coverage

Two more tests:

1. Buffer test: combine balances in all offsets and savings, then measure:

Buffers ÷ (total monthly repayments × 3)

You want ≥ 1 (i.e. 3 months’ repayments covered) as a minimum. Many investors sleep better at 6–12 months.

2. Repayment‑to‑income ratio (after tax):

Total loan repayments (home + investment) ÷ household after‑tax income

If that’s consistently above 40–45% at today’s rates, you’re arguably running hot. Remember lenders already build in a 3% APRA buffer; you don’t want to live at that maximum in real life.

5.3 Cashflow example: the impact of de‑gearing one property

Assume:

• Investment property loan: $600,000, interest‑only at 6.5%
• Monthly interest: about $3,250
• Rent: $700 per week = ~$3,030 per month
• Other costs (rates, insurance, maintenance, agent): $800 per month

Net cashflow before tax:

• Income: $3,030
• Outgoings: $3,250 + $800 = $4,050
• Net loss: $1,020 per month

If you sell this property and clear the $600,000 loan, your portfolio might:

• Lose some future growth
• Lose the rental income
• But instantly free up that $1,020 per month in cashflow plus reduce your overall risk.

After 2026–27, if this is an established property bought post‑2026, that $1,020 monthly loss is no longer cushioned by wage‑based negative gearing. Treat it as a full cash cost.

Selling a single underperforming property like this and reallocating into super, other investments and debt reduction is exactly the type of move that can rebalance risk without “getting out of property altogether”.

6. Strategy choices: keep gearing, de‑gear, or sell?

This table summarises the main pathways.

Often the smartest move is a combination:

1. Restructure loans to be more flexible.
2. Start a disciplined de‑gearing plan.
3. Consider selling one weaker asset if needed.

For loan structuring principles, see How to Design Flexible Investment Loan Structures for Smarter Gearing and Restructuring Loans So Your Property Portfolio Can Keep Growing.

Thoughtful de-gearing can turn a stressed portfolio into a resilient one.

7. Practical ways to start de‑gearing (without blowing up your plan)

7.1 Step 1 – Separate deductible and non‑deductible debt

Under the new rules, it’s even more important to clearly separate home and investment debt with internal splits and offsets.

• Keep your home loan separate and target it first (non‑deductible)
• Have one main loan per investment property where possible
• Use offset accounts rather than redraw for flexibility and clear tax tracing

The 2026–27 reforms make this structure even more valuable because you can:

• Direct extra repayments to non‑deductible debt first
• Keep investment loan balances intact while building buffers in offsets

7.2 Step 2 – Decide your repayment hierarchy

In many cases, a sensible order is:

1. Non‑deductible home debt – pay this down first; it gives the cleanest after‑tax benefit.
2. Riskier investment loans, such as:
   • Higher LVR properties
   • Lower‑yield or more volatile assets
   • Loans with less flexible features
3. Other investment loans – especially if cashflow is marginal or you plan to retire soon.

Within each category, you can choose to either:

• Focus on one loan at a time (debt snowball/avalanche), or
• Spread extra repayments via offsets if you value liquidity.

7.3 Step 3 – Use structure, not just brute force

You don’t have to de‑gear solely through cash repayments. Consider:

• Extending loan terms on lower‑risk properties to reduce monthly commitments while you attack other loans
• Splitting loans so part is P&I (de‑gearing) and part is interest‑only (cashflow flexibility)
• Switching to principal & interest on your home while keeping investment loans interest‑only, but with cash parked in their offsets

For business owners, it’s critical you don’t starve your business of working capital just to hammer investment loans. The guide on smart investment property strategies for time-poor small business owners outlines how to keep business and property risk in balance.

7.4 Step 4 – Consider a targeted sale, not a fire‑sale

If modelling shows your cashflow and buffers are too thin, a targeted sale of one property can:

• Cut risk sharply
• Provide money to clear multiple loans or crush your home loan
• Allow you to top up super or build a liquid “sleep easy” reserve

Which property to sell?

Common candidates:

• Lowest yield relative to value
• Highest ongoing maintenance and capex demands
• Located where you already have concentration risk (e.g. same suburb)

Run the numbers after tax and transaction costs. Remember the new CGT rules will affect how gains are taxed from 1 July 2027, so timing matters.

8. One‑week action plan: decide if you should start de‑gearing now

You don’t need to solve everything this week, but you can absolutely get clarity.

Day 1–2: Map your current position

• List every property, current value, loan balance, rate, repayment type and term
• Add rent and main running costs for each property
• Calculate:
  • Portfolio LVR and stress LVR
  • Repayment‑to‑income ratio
  • Months of repayments covered by your buffers

Day 3–4: Stress‑test and define your target

• Model repayments at 2% higher than current rates on all loans
• Ask: could we comfortably handle this for 2–3 years?
• Decide your target portfolio LVR by your desired retirement date

Example target:

“We want to be at or below 55% LVR within 7 years, with at least 6 months of repayments in offsets.”

Day 5: Sketch your de‑gearing pathway

• Decide whether you’re aiming for:
  • Purely gradual de‑gearing, or
  • Gradual + one targeted sale in the next 5–10 years
• Draft a simple hierarchy: which loans you’d like to reduce first and why

Day 6–7: Get expert input and refine

This is where having one person who understands:

• Your tax position
• Your borrowing capacity
• The 2026–27 reforms

…makes a real difference.

Bring your draft plan to a CPA‑grade mortgage broker/tax adviser and pressure‑test:

• Are we over‑ or under‑estimating risk?
• Are we using the best loan structures available?
• Are there tax consequences (positive or negative) we’ve missed?

A good adviser will help you adjust the order of moves and show you what’s realistic with current lending policies.

FAQs: de‑gearing and paying down investment debt

1. Is it always smarter to pay down my home loan before investment loans?
Usually yes, because your home loan interest is not tax‑deductible, so every dollar of interest you save drops straight to your after‑tax bottom line. But you still need to watch overall risk: if one investment loan is extremely stretched or risky, chipping that down can make sense even if it’s deductible.

2. Should I ever interest‑only my home and pay down investment loans instead?
There are rare edge cases (for example, very short‑term goals or complex tax situations), but for most people this is not ideal. You generally want to shrink non‑deductible home debt first while keeping flexibility via offsets on investment loans. Get personalised tax advice before doing anything that goes against this default.

3. Does it still make sense to stay negatively geared after the 2026–27 changes?
It can for some investors, especially with new builds that retain negative gearing and if your cashflow is robust. But for many “mum and dad” investors buying established properties, you should now treat rental losses as a pure cash cost and make sure your long‑term plan doesn’t rely on tax refunds that will no longer exist.

4. How quickly should I de‑gear once I start?
There’s no universal speed. A common approach is to set a 5–10 year runway and work backwards from your target LVR, adjusting as markets and your life change. Going too fast can strain cashflow and lifestyle; too slow can leave you exposed just as you want to work less. Annual reviews help you stay on track.

5. Is selling a property before retirement a failure of my strategy?
Not at all. Many solid strategies deliberately assume one or two sales to tidy up risk and unlock equity for retirement. The key is that sales are planned and tax‑aware, not forced by distress. In a property‑heavy portfolio, selling a single underperformer can significantly improve your retirement position without abandoning property altogether.

Key takeaways

• De‑gearing means deliberately lowering your investment LVR and cashflow risk, usually starting 5–10 years before retirement.
• New 2026–27 tax rules make high gearing on many established properties less attractive, because rental losses can no longer offset wages.
• Simple metrics – portfolio LVR, stress LVR, repayment‑to‑income ratios and buffer months – tell you quickly if you’re running hot.
• A practical de‑gearing plan usually combines better loan structure, targeted debt reduction and possibly one planned sale, not a fire‑sale exit.
• Mapping your position, stress‑testing and setting a target LVR this week gives you the clarity to act calmly rather than react in a crisis.

If you’d like help turning this into a concrete plan, book a free 15‑minute strategy call at https://localknowledge.finance. In one conversation you can look at your tax, your loans and your retirement targets together – a CPA, tax agent and mortgage broker in the same chair – and sketch a de‑gearing pathway that lets you sleep at night.

General advice only.