Higher interest rates may not be bad news if you’re entering Aged Care
It all depends whether you’re paying the published price or going in as a low-means resident.
Rising interest rates are good news if you want to invest in cash and fixed-interest investments, and not so great if you are borrowing money. But are rising interest rates good or bad if you are moving into aged care?
The answer is complex. It depends on your financial situation and choices – in particular, whether you are required to pay published room prices or you qualify as a low-means resident.
Published prices
The room cost in aged care is usually quoted as a lump sum. You can choose to convert this amount into a daily fee using an interest rate set by the government, based on the 90-day bank bill rate plus 4 per cent.
The interest rate is fixed at the date of permanent entry into aged care.
Your choice may be based on a personal preference to either retain or sell assets. But if comparing options based on financial merits, you could consider the unpaid room price to be like an interest-only loan to the aged care provider, with the difference that once you leave care, the “debt” does not have to be paid, you just stop paying the interest.
If you choose to pay the full lump sum (called a refundable accommodation deposit or RAD), it won’t matter what interest rate applies. But if you choose to pay all or some as a daily fee, like normal loan principles, the higher the interest rate, the higher the daily fee, so a higher interest rate may not be a good thing.
Example: Albert moves into care and chooses to pay the agreed $500,000 room price as a daily fee. If the interest rate is 4.07 per cent, the daily fee is $55.75. But if the interest rate was 5 per cent, the cost would increase to $68.49 per day.
The interest rate is fixed at the date of permanent entry into aged care. Rate changes after that time have no impact on your fees unless you move rooms or move to a new provider, as these changes trigger a reassessment of the room price and interest rate.
Low-means residents
The rules are more complicated for a low-means resident and can be counter-intuitive. If you fall into this category, a higher interest rate may not be bad news.
The room price for a low-means resident is set as a daily fee based on assessable assets and income (up to a current maximum of $60.74 per day). This daily price has no connection to interest rates unless you want to convert the daily fee into a lump sum.
Example: Gordon is assessed as a low-means resident. Assume an assessment of his assets and income calculated a means-test amount (MTA) of $47.84. This will be the maximum amount he is asked to contribute towards his room as a daily fee.
If the interest rate is 4.07 per cent, he needs to pay a lump sum of $429,032 (47.84 x 365 / 4.07 per cent) to eliminate the daily fee. But if the interest rate is 5 per cent, he needs to pay only $349,232 (47.84 x 365 /5 per cent).
For a low-means resident, the higher the interest rate, the less that has to be paid as a lump sum to remove the daily fee. As such, higher interest rates may provide a better outcome.
Making a decision
The interest rate is important when deciding how to fund the cost of a room in aged care. But it is just one factor that needs to be considered. Without good financial advice, it is easy to make a mistake.
Contact us on 03 9584 3343 if you wish to discuss this further.