For senior Australians who cannot live independently at home, residential aged care can provide accommodation, personal care and general health care.
People usually think this is expensive. And many assume they need to sell their home to pay for a lump-sum deposit.
But that’s not necessarily the case. Here’s what you need to consider.
You may get some financial support
Fees for residential aged are complex and can be confusing. Some are for your daily care, some are means-tested, some are for your accommodation and some pay for extras, such as cable TV.
But it’s easier to think of these fees as falling into two categories:
an “entry deposit”, which is usually more than $A300,000, and is refunded when you leave aged care
daily “ongoing fees”, which are $52.71-$300 a day, or more. These cover the basic daily fee, which everyone pays, and the means-tested care fee.
To find out how much government support you’ll receive for both these categories, you will have a “means test” to assess your income and assets. This means test is similar (but different) to the means test for the aged pension.
Generally speaking, the lower your aged-care means test amount, the more government support you’ll receive for aged care.
With full support, you don’t need to pay an “entry deposit”. But you still need to pay the basic daily fee (currently, $52.71 a day), equivalent to 85% of your aged pension. If you get partial support, you pay less for your “entry deposit” and ongoing fees.
You don’t need a lump sum
You don’t have to pay for your “entry deposit” as a lump sum. You can choose to pay a rental-style daily cost instead.
This is calculated as follows: you multiply the amount of the required “entry deposit” by the maximum permissible interest rate. This rate is set by government and is currently at 4.01% per year for new residents. Then you divide that sum by 365 to give a daily rate. This option is like borrowing money to pay for your “entry deposit” via an interest-only loan.
You can also pay for your “entry deposit” with a combination of a lump sum and a daily rental cost.
As it’s not compulsory to pay a lump sum for your “entry deposit”, you have different options for dealing with your family home.
Option 1: keep your house and rent it out
This allows you to use the rental-style daily cost to finance your “entry deposit”.
you could have more income from rent. This can help pay for the rental-style daily cost and “ongoing fees” of aged care
you might have a special sentimental attachment to your family house. So keeping it might be a less confronting option
you can still access the capital gains of your house, as house prices rise.
your rental income needs to be included in the means test for your aged pension. So you might get less aged pension
you might need to pay income tax on the rental income
compared to the lump sum payment, choosing the rental-style daily cost means you will end up paying more
you are subject to a changing rental market.
Option 2: keep your house and rent it out, with a twist
If you have some savings, you can use a combination of a lump sum and daily rental cost to pay for your “entry deposit”.
like option 1, you can keep your house and have a steady income
the amount of lump sum deposit will not be counted as an asset in the aged-care means test.
like option 1, you could have less pension income, higher age-care costs and need to pay more income tax
you have less liquid assets (assets you could quickly sell or access), which could be handy in an emergency.
Option 3: sell your house
If you sell your house, you can use all or part of the proceeds to pay for your “entry deposit”.
if you have any money left over after selling your house and paying for your “entry deposit”, you can invest the rest
as your “entry deposit” is exempt from your aged pension means test, it means more pension income.
- if you have money left over after selling your house, this will be included in the aged-care means test. So you can end up with less financial support for aged care.
In a nutshell
Keeping your house and renting it out (option 1 or 2) can give you a better income stream, which you can use to cover other living costs. And if you’re not concerned about having access to liquid assets in an emergency, option 2 can be better for you than option 1.
But selling your house (option 3) avoids you being exposed to a changing rental market, particularly if the economy is going into recession. It also gives you more capital, and you don’t need to pay a rental-style daily cost.
This article is general in nature, and should not be considered financial advice. For advice tailored to your individual situation and your personal finances, please see a qualified financial planner.
Authors: Colin Zhang, Lecturer, Department of Actuarial Studies and Business Analytics, Macquarie University