What is the best way to fund your aged care costs?

Traditionally people have often sold the family home to pay for entry fees (what were known as ‘Accommodation Bonds). But with the government’s current emphasis on a ‘user pays’ system, retaining the home and using aged care finance (such as a reverse mortgage) is an increasingly attractive option.

In July 2014, the Living Better Living Longer reforms came into force. People moving into aged care are now required to pay one of the following as an ‘entry fee’ for aged accommodation:

  • Refundable Accommodation Deposit (RAD)
  • Daily Accommodation Payment (DAP)

The ‘RAD’ is an upfront lump sum payment to the nursing home. The fee is set by the by the facility, and although the current average is $300,000 to $400,000 but can be much higher in some areas.

In addition, a new ‘Means-Tested Daily Fee’ has been introduced which may add significantly to your overall care costs if the house is sold. Using a reverse mortgage to fund or part-fund aged care accommodation is now a viable alternative in many cases.

How does Aged Care Finance Work?

Seniors First has access to some lenders who can provide reverse mortgages to pay for aged care. This allows the borrower to release up to 45 per cent of the home value (depending on age) with no requirement for regular monthly repayment- the interest is capitalised each month onto the loan balance. The amount borrowed, plus any accumulated interest (including compound interest) and fees is then repaid when the property is eventually sold.

So for pensioners and retirees who have a limited income, reverse mortgages are the preferred method for aged care finance. In some cases where self-funded retirees have enough income to service a conventional mortgage, Seniors First will recommend a home or investment loan to finance aged care & accommodation.

A reverse mortgage loan may be a good solution for aged care costs if:

  • the family want to retain the home for emotional reasons
  • a spouse or family member is still living in the home and a sale is not possible
  • the resident wants to keep the option of ‘moving back home’
  • it is a poor property market and a bad time to sell the home
  • your financial planner recommends this as a strategy to minimise your costs or improve your cash-flow

Your FREE Guide to Aged Care Finances (updated for 2014)

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