Aged Care Guru’s Newsletter – March 2020
Interest rates drop for Aged Care borrowers
Rachel Lane, Principal, Aged Care Gurus
While aged care is means tested, that doesn’t mean it is affordable. Many people cannot afford aged care without borrowing. The new year brought some good news for these borrowers: a drop in two government-set interest rates. The Pension Loans Scheme (PLS) rate dropped from 5.25%/year to 4.5%/year and the aged care maximum permissible interest rate (MPIR) reduced to a new low of 4.91%/year.
The Pension Loans Scheme (PLS) is like a reverse mortgage, except you can’t take a lump sum. It enables you to top up your income with a fortnightly loan from the government of up to $1,400 for singles and each member of a couple separated by illness and $2,110 for a couple. The PLS is an option if you own an eligible Australian property – which requires you to have ownership over the property and your name on the title – so a granny flat, retirement village or land lease community arrangement is unlikely to qualify.
PLS interest compounds fortnightly, which means that each fortnight you pay interest on the balance of your loan, which includes interest on the payments you have previously received. Compound interest is a great situation for investors and a terrible one for borrowers.
The MPIR applies to people funding accommodation in residential aged care, essentially whatever you don’t pay as a lump sum (known as a Refundable Accommodation Deposit or RAD), you pay as a daily charge (DAP), which is calculated using the MPIR.
For example, if the RAD is $400,000, and you pay $200,000, you will pay interest on the outstanding $300,000 at 4.91%, which is $26.90/day. To ease cash flow pressure many residents deduct their DAP from their RAD so each month, the RAD reduces and the DAP increases.
In aged care the MPIR is set on entry and only changes if you move to another room or facility – so the new MPIR will only affect people who enter care or move after 1 January 2020. The lower PLS interest rate will apply to existing and new borrowers from 1 January.
Let’s look at an example …
Shirley is moving into an aged care facility with a RAD of $450,000. She has $200,000 that she will pay towards her RAD, leaving her with a DAP of $33.63/day. She owns a home that is eligible for the PLS, so she wants to compare the two funding methods.
|Borrow $471/fortnight through PLS at 4.5%||Pay $200,000 RAD and deduct DAP at 4.91%|
|After||Loan Balance||RAD Balance|
|5 years||$68,718||$130,595 RAD
or $69,405 cost
The difference between the two scenarios is around $700 after 5 years but bear in mind that to borrow through the PLS Shirley needs to provide her property as security and may incur costs associated with registering or removing the charge.
For people who need to borrow to fund care it is vital to seek advice about the options, there is always more to the cost of borrowing than just the interest rate you need to understand the implications for your pension, cost aged care now and in the future and how such a decision will affect your estate planning wishes.
What a difference a day makes in aged care
For many years couples entering aged care were often advised to move in on separate days, this simple but effective strategy often meant that the first person qualified as a Low Means resident while the second paid the market price. But as the Maximum Permissible Interest Rate drops the Refundable Accommodation Contribution (RAC) becomes more expensive, in some cases more than the market price.
When it comes to aged care everyone has the choice of paying towards the cost of their accommodation by a lump sum, daily payment or a combination of the two (you can even deduct your daily payment from your lump sum if you choose).
For people who pay the market price, the lump sum amount is set by the facility and requires approval if it is above $550,000. The daily payment is calculated using a government set interest rate, known as the maximum permissible interest rate (MPIR) and is charged on any amount of unpaid lump sum. For example, if the market price was $500,000 and you paid $200,000 by RAD then the DAP would be $40.36/day
Low means residents can pay a Daily Accommodation Contribution (DAC) which is calculated by a means assessment which takes into consideration their assets and income. The DAC is then converted to a lump sum equivalent, known as a Refundable Accommodation Contribution (RAC) using the same MPIR.
In simple terms when the MPIR reduces the Daily Accommodation Payment gets cheaper for those paying the market price but the Refundable Accommodation Contribution for low means residents gets more expensive.
With a spouse living at home having the other enter aged care as a low means resident may seem logical but it’s important to look at the cost once both members are living in care, especially when the move is imminent.
Let’s look at an example…
Jack and Jill are pensioners with a home worth $700,000(net), $100,000 investments and $20,000 of personal assets. The market price RAD of the rooms at the facility they would like to move to is $350,000.
If Jack moves into residential aged care the day before Jill he will be classified as a low means resident and his Daily Accommodation Contribution (DAC) will be $5/day with an equivalent Refundable Accommodation Contribution of almost $37,541.
When Jill moves in the next day she will pay the market price of $350,000 by RAD, DAP or combination.
When Jill moves into care Jack’s DAC will be recalculated up to $57.49/day with an equivalent RAC of $427,369 – more than $77,000 higher than the market price. Assuming the house is sold and the RAD/RAC paid in full this would mean that Jack and Jill’s investments would be reduced to just over $22,500.
But if Jack and Jill both moved in on the same day they would each have paid the market price of $350,000.If they paid their RAD’s in full they could keep their $100,000 investments intact.
If you are navigating aged care for yourself or a loved one make sure you seek advice from a Retirement Living and Aged Care Specialist.
There is no substitute for quality financial advice.
This advice is of a general nature only and is based on current laws and their interpretation. The application of the information in this document will depend on the individual’s circumstances. Before making any investment decisions, we recommend you consult a financial advisory to take into account your particular investment objectives, financial situation and individual needs.
Jennifer Richardson, 123 Financial Group
Suite 7, 29 Smith Street
CHARLESTOWN NSW 2290
Ph: (02) 4920 7886