How do rising interest rates impact my Aged Care costs?
Information based on current fees and charges as at 20 March 2023.
Please note, the information and strategies contained in this article are intended as general advice only, and while every care is taken, we make no representations as to the accuracy or completeness of the contents. We have not considered your personal circumstances prior to implementing these strategies. We recommend that you seek personal advice to ensure these strategies are suitable for you.
If you read our earlier article, you would understand Aged Care facilities have an entry cost. Much like buying a home, if you don’t have enough money to purchase it outright, you must obtain a loan. In Aged Care terms, you can obtain a loan from the Government to purchase a room at an Aged Care facility and the repayments are called a Daily Accommodation Payment (DAP).
In recent times the interest rate, also known as the Maximum Permissible Interest Rate (MPIR), has risen to 7.46% pa. Compared to a year ago when the interest rate was 4.04%, it marks a sharp increase in costs.
With change comes questions and what we often hear is “how does this affect me moving to care? Or, “are there strategies that can assist in reducing aged care fees?”
In this article, we look at the impact of rising interest rates on aged care costs along with strategies that can be used to make the best meet your financial situation.
Refundable Accommodation Deposit (RAD)
In January 2022 when the MPIR was 4.04%, a full fee paying resident with an outstanding entry cost (RAD) of $400,000 was paying $16,160 pa. Fast forward to this year and with an MPIR of 7.46% the same resident has seen their interest repayments (DAP) increase by $13,680 pa.
Unless your investments can consistently achieve a rate of return of 7.46% pa (the breakeven point) or higher, you should consider a part or full payment to your RAD.
It is important to consider what funds are left aside after paying the RAD to ensure you can meet any further aged care or personal costs without leaving yourself short.
Strategies to consider if both members of the couple are entering care
In recent times when the MPIR was below 4.04%, the strategy of moving one member of a couple into care first before the second entered care wasn’t particularly beneficial. This strategy is where you have the home exempt by having the first spouse enter care, and their share of assets under the first asset threshold to make them ‘partially supported’, and then the second member of the couple moves in the next day as a full fee-paying resident.
This was because the first person moving into care would have the maximum Daily Accommodation Contribution (DAC) payable which previously (January 2022) was $59.49 pd and with the MPIR at 4.04% this meant the equivalent Refundable Accommodation Contribution was approximately $537,471 so unless the room and RAD you were moving into was higher than this, it wasn’t beneficial to consider.
However, now (March 2023) this is once again a strategy we are considering for couples both entering care to see if it is beneficial for them. This is because with a maximum DAC of $65.49 per day and an MPIR of 7.46%, the equivalent RAC would now be $320,427, which is more likely a lower lump sum to pay based on the average RAD price. Giving the couple a potential benefit of having a lower overall lump sum to pay for their care, if the RAD at their chosen facility was greater than the $320,427 RAC lump sum.
If you are interested in seeing if this is a strategy that you or a family member may benefit from, please seek financial advice from a qualified aged care financial adviser who can see if this is beneficial to you.
In the next article of our Aged Care series we discuss one of the most common questions of those entering Aged Care, “Do I need to sell the home?”.