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How to get a home loan for aged care accommodation
Get the funding you need to pay for your aged-care accommodation costs with an aged-care home loan.
Helping a loved one make the transition from their own home into an aged-care facility can be an emotionally challenging time. It can also be financially challenging, as the cost of high-quality accommodation does not come cheap.
The traditional approach to funding aged-care accommodation was to sell the family home, but in recent years several aged-care home loans have become available to help you cover these important expenses.
How much does aged-care accommodation cost?
Since the Living Better Living Longer reforms came into force in July 2014, access to aged-care accommodation in Australia has been based on a “user pays” system. The amount that older Australians need to pay for aged-care accommodation is based on an income and assets test. If your income and assets are below a certain amount then the government will cover your accommodation costs, but if you can afford it you will need to pay for accommodation out of your own pocket.
The main charge to be aware of is the Refundable Accommodation Deposit (RAD). An upfront lump sum payable to the aged-care facility, the RAD amount is set by the nursing home and averages $350,000. However, depending on the facility chosen and where it is located, it’s not uncommon for the RAD to exceed $500,000 and even push up towards the $1 million mark.
You can pay the RAD in full when first entering an aged-care facility, while you also have the option to make an ongoing rental-style accommodation payment, known as a Daily Accommodation Payment (DAP) or a combination of the RAD and DAP.
Then there are care fees to consider. A basic daily fee applies to everyone and covers expenses such as meals, power and laundry. This fee is 85% of the single person rate of the basic age pension, which at the time of writing was $49.07 per day. Depending on your financial position, an additional means-tested care fee may also apply, which at the time of writing was capped at $26,380.50 per year.
What is an aged-care home loan?
An aged-care home loan is a loan designed to help you fund the cost of aged-care accommodation. These loans typically take the form of reverse mortgages, also known as equity release loans, which allow you to pay for aged-care accommodation costs without having to sell your family home.
A reverse mortgage allows the borrower to release some of the equity in the family home to pay for the cost of aged-care accommodation. No regular repayments are required as the interest on the loan is capitalised onto the loan balance each month.
You can then repay the amount borrowed, along with any loan fees and interest that has accumulated, when the home is sold at a later date.
What are the features of aged-care home loans?
Although loan features differ between reverse mortgage providers, aged-care home loans usually boast the following features:
- Up to 50% LVR. These loans commonly allow you to borrow an amount equal to around 45% or 50% of the value of your home.
- Must be used for aged-care facility. While ordinary reverse mortgages can be used for a wide range of purposes, aged-care loans must be used to pay the RAD and secure your place in an aged-care facility.
- No regular repayments required. You do not need to make any regular repayments towards your loan. Instead, interest payments are added onto the loan balance each month and the total amount can be repaid when you choose to sell your home.
- Available to applicants 60 and above. Different lenders impose their own age limits on their reverse mortgage products but you will typically need to be at least 60 years of age (and often more) to qualify for a loan.
- Must be your primary residence. The home on which you take out a reverse mortgage must be your primary residence and you must not be renting the home out to someone else.
- Fees apply. The main fees you need to consider when comparing aged-care loans are application fees and monthly fees. Application fees typically range anywhere from $0 to $1,000, while if a monthly fee applies it could be up to $12 or even $15.
- Flexible terms. The terms on most reverse mortgages are usually open-ended. However, some newer entries to the market introduce set loan terms, such as the seven-year loan term on La Trobe Financial’s Aged Care Loan.
What are the pros and cons of aged-care home loans?
Pros
- Get the funding you need. Aged-care loans can help you access the financing you need to secure a place in your chosen aged-care facility.
- Retain your home for emotional reasons. Sometimes your emotional attachment can make it very difficult to sell the family home but taking out an aged-care loan allows you to hang on to it.
- Flexibility. By retaining your home, you can leave open the option of returning to it at a later date. Your spouse or other family members can also continue to live in the home.
- Sell your home at the right time. If the property market is in the midst of a downswing when you need to move into an aged-care facility, taking out a reverse mortgage allows you to hold onto your home and sell it when market conditions improve.
- Rent out your home. Depending on the terms of your loan, you may be able to rent out your home to generate additional income.
Cons
- Higher interest rates. Reverse mortgages tend to attract higher interest rates than traditional mortgages.
- Could affect your pension. Taking out a reverse mortgage could impact your ability to access a pension so contact the Department of Human Services to find out how you will be affected.
- Debt. Taking on additional debt after retirement is always risky so it’s important to make sure you don’t end up owing an amount you cannot afford to repay.
Are there any alternatives?
If an aged-care reverse mortgage isn’t the right solution for you, there are a few other options you might like to consider to help pay for the cost of nursing home accommodation:
- Sell the family home. This is the most obvious solution for many older Australians. If keeping the family home is not a viable option, selling it can provide the funds you need to pay the RAD. This strategy may mean you end up with additional funds left over to invest, but it also means that the full value of your home will be taken into account when the means-tested care fee is being calculated (if you retain the home, its value is capped at $157,987.20 when this fee is calculated).
- Sell investments. The next option is to hold onto the family home but sell other investments, for example shares and term deposits, to fund the move into an aged-care facility. Once again, this can impact on the means-tested care fee, but depending on your financial circumstances could be worth considering.
- Ask your family to pay the RAD. Your family members may offer up their own funds to help pay part or all of the RAD. This could be an option if you want to retain the family home, or if you want to guarantee quick entry to the aged-care facility but your home is taking a while to sell. Getting a formal loan agreement drawn up will minimise the chance of any problems.
- Deduct the DAP from the RAD. A fourth option, available to people who have only paid part of the RAD, is to draw down on the RAD you have already paid. This can be a useful option for people experiencing cash flow issues after paying the RAD. However, the amount of your deposit will reduce as the DAP is continually deducted from the RAD so the aged-care provider may ask you to top up your RAD amount.
As you can see, there are several factors that need to be taken into account when deciding whether an aged-care loan or one of these other options is the best choice for you. Seek financial advice from an expert to ensure that you make the right decision.
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