Strategies to pay for residential care

Strategies to pay for residential care

The rules for aged care set what fees are payable and how they are calculated. You might not have much choice about these fees, but you do have choices around how you structure your finances to make your care affordable. The choices you make will have an impact on cashflow, Centrelink / Veterans’ Affairs entitlements, income generated and total expenses. It can be a complicated set of interactions.

This section provides a brief outline of some of the key strategies for funding residential care. It is a general overview and does not take into account any particular circumstances so you should always seek advice to determine your own personal impact. It is not a complete analysis of all implications but provides a guideline to help with your research and understanding.


Strategy 1: Pay the RAD or the DAP?

When you are offered a room in residential care, the care provider needs to confirm the published price for the room and this is included in your Resident Agreement. You will have 28 days (from start date) to decide whether you want to cash in investments/assets and pay the lump sum refundable accommodation deposit (RAD) or instead, pay the daily accommodation payment (DAP).

Your decision may depend on:

  • Do you have liquid assets available to make the payment?
  • Are you willing to sell assets or cash-in investments to make the payment?
  • What is the impact on your ability to generate income to meet your other expenses?
  • The relative investment returns and impact on your overall net wealth position?​
  • How it will impact your Centrelink/Veterans’ Affairs entitlements as the RAD is an exempt asset and may help to increase your entitlements?​

Tip: From a financial point of view, think about an unpaid RAD as like having an interest-only loan owing to the aged care provider. Paying the RAD will reduce your expenses by the amount of daily accommodation payment (DAP) otherwise payable. The cost of paying the RAD is the earnings you give up by not having the money invested. If the interest rate used to convert the RAD into a DAP is higher than the rate you had the money invested at, it may be a better financial option to pay the RAD.


Strategy 2: Not enough liquid assets to pay the RAD

You may not have enough assets to pay the refundable accommodation deposit (RAD) in full, or you may need to wait until you have sold your home to have enough money to make the payment.

Paying the daily accommodation payment (DAP) in the interim may put significant stress on your cashflow. One way to make your money stretch a bit further is to pay part of the RAD. This will reduce the DAP payable. Then ask the provider to take the rest of the DAP out of the RAD that you paid them.

Some things to know before making this decision:

  • The RAD paid is guaranteed by the Government, so your money is not at risk.
  • When you leave care or pass away, the balance of your RAD account is refundable to your estate. However, as you have been “spending” some of the balance, only the remaining balance is refunded.
  • All residential care providers must allow you to implement this strategy.

Tip: Think of this like you are pre-paying some of your “rent” and this gives you a discount on the total rent payable.


Strategy 3: Keep or sell your home

If you will leave your home empty when you move into residential care, you may choose whether to keep or sell your home. This can be a difficult and emotional decision. We attach a lot of sentimental value to our homes, but we also have a lot of our wealth stored in the home and we need to make all our assets work for us.

Selling your home may free up capital to pay your refundable accommodation deposit (RAD) and create cashflow to pay your other ongoing expenses. But it can also increase your means-tested fee and reduce your age pension due to the loss of the concessional status that your former home had under aged care and Centrelink rules.

Some things to know before making this decision:

  • For Centrelink/Veterans’ Affairs purposes, your former home may remain an exempt asset for up to two years after you move into care. This can help to maximise your pension entitlements. If you sell you will become a non-homeowner which gives you a higher asset threshold, but the sale proceeds become an assessable asset. The RAD is an exempt asset, so using proceeds to pay the RAD may help to restore all or some of your pension entitlements.
  • When calculating your means-tested fees, your former home is only assessed at a “capped value”. If you sell, the full sale proceeds will become assessable and your means-tested fee may increase. But if you used sale proceeds to pay the RAD, the increased fees will be balanced by the reduction in the daily accommodation payment (DAP).
  • Keeping your home will increase expenses as you need to maintain your home and pay ongoing costs such as rates and insurance. It may also create risks around the potential for high maintenance costs and repairs.
  • If you keep your home, you may be able to rent the home to increase your cashflow. This can help to meet ongoing expenses, but rent is assessable income.
  • Homes have the potential to increase in value (ie capital growth) which can help to increase your financial wealth and provide a greater level of security. However, as with any growth asset, you also have the potential that the asset value can go backwards.

Tip: Many people find the decision whether to keep or sell the home is a personal decision driven by emotions and perceptions of growth. Considering how each option impacts cashflow and your net wealth position can help add an objective overlay to ensure your decision is also affordable. A financial comparison can also help to weigh up the pros and cons of keeping or selling.


Strategy 4: Not enough cashflow

If you have used up most of your liquid investments you might start to worry that you won’t have enough to continue meeting your expenses. If you don’t want to (or can’t) sell your home you might be able to borrow to draw some of the equity out of the home.

A reverse mortgage (or aged care loan) allows you to borrow either a lump sum or regular income drawings using your home as security. The benefit of a reverse mortgage is that you don’t have to make repayments until the end of the term. This might be a fixed number of years, when you sell the home or when you pass away. Check the details in your contract to determine the requirements.

You can use a commercial lender or the Government offers a low-interest option. Read here for more information on the Government’s Home Equity Access Scheme (HEAS).

Some things to know before making this decision:

  • The interest and any other fees charged by the lender will add to the loan. The compounding effect will increase the amount you owe over time.
  • The HEAS is generally limited to regular fortnightly income drawdowns, although there is a limited opportunity to convert 6 month’s worth into an advance lump sum.
  • The amount you can borrow may depend on the value of your home and your age.
  • You need to own a property (some providers may require it to be the home you live in) that the lender is able to secure a mortgage or caveat over. This means you will usually not have access to this option if your home is in a retirement village or land lease community.
  • Shopping around to compare interest rates and conditions is important to get the deal that works best for you.
  • Always check that the loan has a “no negative equity guarantee”. This means you can never owe more than the value of your home.

Tip: If you are wanting to increase cashflow, borrowing regular drawdowns (instead of a lump sum) can minimise the cost of borrowing and protect more of the equity in your home. In some limited cases you might also be able to apply for financial hardship concessions. Read more