If you're starting to explore residential aged care for yourself or someone you love, you've probably noticed that accommodation costs can seem quite daunting. In fact, the average room price in Australia is now around $570,000, with significant increases over the past 18 months.
The good news is that you may not need to find the money or cash your investments to pay this full amount as a lump sum.
When moving into residential aged care, you will be given a choice on how you pay for your accommodation. You can pay the full amount as a lump sum, known as a Refundable Accommodation Deposit (RAD), or pay a Daily Accommodation Payment (DAP), or you can choose a combination.
So, where do interest rates come into it?
If you choose the daily payment option, the amount you pay is calculated by converting the lump sum into a daily fee using a government-set interest rate called the Maximum Permissible Interest Rate (MPIR). When official interest rates increase, this flows through to a higher MPIR which currently sitting at 8.43% per annum - considerably higher than just a few years ago.
The rate is locked in when you enter care (unless you move rooms) but the higher current rates may change affordability and funding decisions for families now looking at care options. A strategy that may have made sense when interest rates were low may no longer be the most cost-effective approach today.
Under the current rules, you also need to take into account the impact of inflation-linked indexation each six months if you choose the daily payment option.
Make it your choice
One of the biggest misconceptions we still encounter is that the aged care provider decides how accommodation must be paid. Providers can set the room price, and some may prefer a lump sum, but the choice is yours.
You have the right to decide whether to pay a lump sum, a daily payment, or a combination option. Most people start with a daily payment and then if they choose, can pay the lump sum (in full or part) at any time after entry.
Because these decisions can have a significant impact on your cash flow, age pension, investments and even the value of your estate, it's worth taking the time to seek advice before making a commitment.
Every family's financial situation is different. Understanding your options and developing a strategy that suits your circumstances can help you make the most of your available resources and provide greater peace of mind during what is often a significant life transition.
The right advice won't change the interest rate, but it can help ensure you're paying for aged care in the way that's right for you.
We offer licensed and specialist aged care advice, to help you make the right choices. If you'd like to talk through your situation or understand your next steps, contact us today on (08) 8223 6880 to discuss your situation. Alternatively visit our website to make a booking by phone, Zoom or in person: www.agedcarefinancialspecialist.com.au.
IMPORTANT INFORMATION: Denise Kipling (ARN 235861) is an Authorised Representative of Financial Success SA Pty Ltd (ACN 105 603 058) ATF the Financial Success Trust ABN 68 114 614 838 t/as Financial Success specialising in Aged Care Financial Advice is a Corporate Authorised Representative No 235520 of InterPrac Financial Planning Pty Ltd AFSL 246638 ABN 14 076 093 680. The advice contained in this document is of a general nature and has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on the advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs; obtain a Product Disclosure Statement (PDS) relating to that product and consider the contents of the PDS and seek financial advice. No responsibility is taken for persons acting on the information within this document. Persons doing so, do at their own risk.