Payment for a parent's residential aged care accommodation costs

Technical resource

Aged care can be costly. In some cases a relative is willing assist financially but before they so they should first be aware of the impact on other fees.

Accommodation payments for residential aged care can be costly and difficult to meet, especially if a person has limited funds or illiquid assets. In some cases, the only significant asset owned by the person entering care is their home. Options such as selling the home, using home equity to borrow, using a reverse mortgage or other types of loans could be considered.

In some cases a relative, (usually the child of the person entering care) is willing to pay the lump sum payment, called a Refundable Accommodation Deposit (RAD). Without this financial assistance, the person may not be able to reside in their preferred accommodation or be able to afford the necessary aged care fees.

This article considers the consequences of using money lent by a relative to pay for the person’s aged care RAD or daily accommodation payment (DAP), which is the interest charge on any unpaid RAD. It also considers whether a person should borrow money to fully or partly pay the RAD, or if the DAP should be paid as a regular amount instead.

When considering whether to pay the RAD or a DAP, the social security and aged care treatment as well as the cost of borrowing the required funds, needs to be assessed.

Means testing of the RAD and DAP

The social security and aged care means tests do not assess regular payments of the DAP by a relative. The value of the RAD paid is an exempt asset for social security purposes. So, paying for the RAD with the person’s own funds may help them receive more in Age Pension.

For aged care purposes however, the RAD is assessed as an asset even if it’s paid from borrowed funds. It makes no difference if the money is borrowed from a relative or sourced from a reverse mortgage or accommodation bond loan. A large RAD can increase a person’s daily means-tested care fee (MTCF) significantly.

Example

Mary is a single aged pensioner, with a home valued at $800,000 and $30,000 in her bank account. Mary enters residential aged care in August 2020 which charges a RAD of $500,000 (or its equivalent in DAP, or DAP/RAD combination). The maximum permitted interest rate for the RAD is 4.10% per annum. Assume no extra services. Mary’s children wish to keep the family home because it has potential for significant capital growth. Michael, one of Mary’s three children, suggests he can lend the money to either pay a DAP regularly or pay the RAD in full. The table below shows the difference in fees where the RAD is paid in full or where a DAP is paid regularly.

Summary of Aged Care Costs

DAP only Fees per annum

Full RAD Fees per annum

Basic daily care fee

$19,071

$19,071

Means tested care fee

NIL

$8,202

DAP

$20,500

NIL

Total aged care costs

$39,571

$27,273

While the total aged care fees reduce in the scenario where the full RAD is paid (because no DAP is paid), the MTCF can actually increase the aged care cost. There are also other considerations when deciding how accommodation payments should be funded. These include among others, the amount borrowed, the cost of borrowing, and when the money will be repaid.

The cost of borrowing money

When the DAP is paid regularly, the borrowed amount accumulates over time compared to paying an upfront RAD, for which the borrowed amount is significant right from the start.

The relative might withdraw from an investment (which may trigger assessable capital gains and forgo income) or borrow to fund the person’s RAD. The interest incurred or opportunity cost borne by the relative who lent funds should also be considered.

The analysis of Mary’s example below compares the cost of interest on the RAD of $500,000 and MTCF versus the cost of paying the monthly DAP plus interest over a period of three years using different interest rates. In the analysis the DAP equals $20,500 per annum based on a 4.89 per cent per annum MPIR. The monthly DAP is $1,708.33 and interest is compounded monthly.

Loan interest rate

DAP + interest on DAP

MTCF + Interest on MTCF
and RAD

1.00%

$62,457

$39,520

2.00%

$63,434

$55,574

3.00%

$64,429

$72,099

4.00%

$65,444

$89,109

4.98%

$66,365

$104,665

5.00%

$66,479

$106,616

6.00%

$67,535

$124,635

Paying the RAD and the MTCF provides a better outcome unless the borrowing rate is higher than the prevailing interest rate of about 2.5 per cent per annum. Generally, if the average interest rate increases, the MPIR will also increase, as will the DAP.

The amount of RAD can make a difference

The amount borrowed should also be considered. In the scenario below we use different RAD amounts. The full RAD, MTCF and DAP are paid with borrowed money. The borrowing rate is constant at 2.5 per cent, per annum.

Loan interest rate

DAP + interest on DAP

MTCF+ interest on MTCF and RAD

$300K

$38,357

$36,052

$400K

$51,143

$49,913

$500K

$63,929

$63,777

$600K

$76,715

$77,638

$700K

$89,501

$91,503

$800K

$102,286

$105,364

The results show that paying the RAD and resulting MTCF is generally a better choice.

Repayment of borrowed money

As the RAD runs into the hundreds of thousands, the relative lending the money will generally expect to have the money paid back, usually when the person passes away.

In most cases the RAD is refunded by the aged care facility to the deceased’s estate. Arrangements should be made before the money is lent to ensure the orderly repayment of the loan.

Generally where the lender is the sole beneficiary of the deceased estate it’s easy to collect the loan. However, where there are other beneficiaries or claimants to the estate, the family should agree on how and when the loan will be repaid. The family should be encouraged to seek legal advice on documenting the loan and reviewing any impact on the person’s will. While there is a cost to this advice, it may prevent more costly disputes in the future.

Conclusion

For a resident who is not low means, the cost of accommodation in residential aged care is significant. Establishing the better option when paying aged care fees with borrowed money will make a difference to the person and their family.

Next: Assessment for entry into an aged care facility

Aged care facilities are designed for older people who are not able to live at home. There are a number of important considerations when choosing a facility.
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