In this work, we study the mechanical response of shape memory alloy (SMA) wire reinforced composites using a recently developed novel discrete particle model. In this model, the discrete particles interact through forces specified by the continuum thermoelastic free energy of the material. We study the formation and evolution of fine microstructure in the SMA composites with different matrix properties under thermal and mechanical loads. The effect of phase transformation and detwinning in the SMA on the overall mechanical response of the composite is studied. The elastic modulus of the matrix has a significant effect on the formation of the microstructure of the SMA. This in turn affects the overall damping response of the composite. Furthermore, there have been few studies of the role of the evolving strain due to phase transformation and its effect on debonding of the SMA wire reinforcement. Using this model, fibre pullout tests are simulated to characterize the fibre-matrix interface. The role of the phase transformation of the SMA wire and the frictional sliding of the debonded portion of the fibre is studied. The role of the relative strength of the interface and the matrix is also discussed. From the simulations, it is observed that the phase transformation delays the debonding of the SMA wire from the matrix.