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Financing strategies for funding care
Posted by on August 16, 2012

Aged care is not set up so people can readily decide where they want to go and book in when it suits. Popular places have long waiting lists and demand for beds outstrips supply. It often comes down to how much you are prepared to pay.


Ian Yates, Council of the Ageing chief executive, says even with people entering care later than they used to, they and their families are no better prepared.

He says most people fronting a facility looking for a place will be given payment options to suit the provider rather than the resident.

“Independent advice will tell you there are alternatives to finance your way into care and the implications that will have on your assets and income going forward,” says Yates.

Changes outlined earlier this year in the government’s Living Longer Living Better aged care reform package mean aged care will increasingly become a user pays system – where more money buys better care – which will require more people to think about how they pay for their care.

The proposed reforms include more home packages to enable people to stay at home longer; changes to the income and assets tests to determine cost; and the removal of the distinction between low and high care. These re not due to come into place until July 2014.

Discussion around finances are paramount because you are dealing with huge assets and costs now and in the future, Yates says.

Tender Living Care founder Denise Tomaras says it is important for families to recognise when parents might need care so plans can be put in place rather than wait for a crisis.

“They can put on a good show but they can’t hide everything. Look for signs like personal hygiene declining, unpaid bills, weight loss and missed appointments,” she says.

This week Smart Money outlines the bond payment options and possible financing strategies.

Bond options

An Aged Care Assessment Team (ACAT) will make recommendations determining whether a person enters a low care or high care facility or what level of services they could get at home care.

Someone seeking a bed in a low care facility will be asked to pay an accommodation bond – the equivalent of an interest free loan to the aged care facility while you are a resident there – which is negotiated with the facility.

iPac Financial Care adviser Paul Intagliata says the average accommodation bond for metropolitan areas is about $300,000 – $330,000, with some residents paying upwards of $1 million on a bond as a result of negotiating a reduction in the daily care fees.

Most of this is refundable on leaving the facility. An approved provider is allowed to deduct monthly amounts, called retention amounts, from a bond for up to five years to help cover its maintenance and own funding costs. The government sets the maximum retention amount each July, with the current amount for new residents $323 a month for a maximum of five years. Based on this, the maximum retention amount is $19,380 if the stay is longer than five years. (Under the proposed reforms, the retention fee will be removed.)

The only stipulation placed on facilities regulated under the Aged Care Act – not all are – is that they must leave you a minimum amount of $40,500 when calculating the bond. Facilities not government funded or regulated by the Aged Care Act do not charge accommodation bonds but have a weekly fee.

In all cases there is a basic daily care fee and (sometimes) a daily income-tested fee which are determined by the Department of Health and Ageing. The daily care fee depends on one’s pension status, while the income tested fee is determined by income as assessed by Centrelink.

The income-tested fee is not necessarily paid by everyone. For example, full pensioners will not pay an income-tested fee. Everyone pays the basic daily care fee.

There are also a limited number of high care facilities with extra services where people pay an accommodation bond and for an extra fee – it could be $10 to $120 a day – can receive additional services like wine with meals or daily newspapers.

Lifetime Planning financial planner Anna Lawton says while most facilities would prefer a lump sum bond payment, under current legislation they have to give people an option on how to pay including paying part of the bond and interest on the owed amount. The maximum permissible interest rate on an unpaid bond is set by the government and is 7.66 per cent.

In most cases the value of a person’s home or other assets will determine the entry fee and ongoing care costs. Once a bond is paid it is no longer assessed for asset or income test purposes.

The family home

To sell or not to sell is often the biggest dilemma facing families whose remaining living parent is looking at moving into aged care which requires an accommodation bond or an accommodation charge.

Anna Lawton says where a home is left vacant when the owner goes into care the value of the home may be used to determine how much bond you pay to the facility.

But there is no rule to say someone has to sell the family home to pay the bond. Often it is not in the individual or the family’s ultimate interest to do so, she says. Two key considerations are the impact of the value of the home on the bond or accommodation charge and how it impacts any aged pension.

Lawton says retaining a pension is often a priority for people even if selling the family home means they can access a far greater amount of income from their released capital.

Any surplus funds left after the sale of a house and bond payment could be invested and used to cover other expenses, however a person’s aged pension will reduce if their assets exceed relevant thresholds.

Two ways to keep a home exempt for aged care assessment cost purposes is to rent it out, with the rent going towards an accommodation charge (for high care) or interest costs (for low care). Other assets, including those of another family member, could be used to pay part of a bond.

It may also be possible to borrow against the equity in the home to pay a bond or ongoing charges (see ‘Equity in the home’).

When the bond is paid in this way, the value of the home can be excluded for Centrelink purposes and the accommodation bond and the income-tested fee can be lower. Lawton says it may be possible to negotiate payment of a higher bond in exchange for reduced fees such as the extra services fee or the daily care fee. The impact of this is it quarantines funds for Centrelink purposes, keeps income tested fees to a minimum and gives room to negotiate lower fees overall.

For example, where a person has $200,000 left over after the sale of a house and payment of a $300,000 bond they could pay a bond of $500,000 and negotiate a 3 per cent reduction or $6000 a year on the fees.

Paul Intagliata, ipac Financial Care adviser, says once a facility has seen an asset assessment, that is generally what they need to base the bond on. However, everything is negotiable.

It is important people intending to sell their home don’t overstate the value for bond assessment purposes, particularly if the facility is going to take everything but the $40,500.

In a flat property market a house could sell for far less than the negotiated bond.

Where there are children much better off financially than their parents who own their own home but don’t want to sell it in the current depressed market the most efficient way is for the children to pay the accommodation bond from their interest-bearing assets, says Financial Freedom Solutions specialist aged care adviser Val Nigol.

This will reduce their income tax and reduce their parents’ accommodation cost by not having to pay the 7.66 per cent interest on the unpaid bond amount, he says.

The children could also borrow against their parents’ home to pay part of the bond.

Nigol says renting out the parents’ home could help with the cash flow, with the rental income accruing to the parents for income tax, aged care fees and charges purposes.

“In the end, it always comes down to the individual circumstances.”

Equity in the home

There are three main ways to use the equity in a home to pay accommodation bonds or charges that could avoid the need to sell the home quickly, especially in a down market. Reverse mortgages are an equity release scheme where the equity in the home is used as security against a loan that is repaid when the home is sold.

Now on offer by St George, Commonwealth Bank and Bankwest the initial loan will vary depending on the age of the lender and the value of the home. The loan can be taken as a lump sum or drawn down in periodic payments. Factors such as property growth, the interest charged on the loan and the length of the loan will determine by how much the equity in the home will reduce and the loan size grow.

Deloitte financial services partner and long time analyst of reverse mortgages James Hickey says based on a $1 million house a person aged 85 may be able to draw funds up to $250,000 to use as a bond payment. Someone going into high level care may only need the loan for a year.

Assuming property growth is flat and an interest rate of 7.6 per cent, after one year the loan balance would rise to about $269,000 and the net equity would be reduced to about $731,000, he says. Should the loan be needed for five years, in a property market where growth is zero the net equity in the $1 million home may drop to $639,420 and the loan rise to $360,580.

“Many people enter aged care are not thinking it will be forever when the reality is very different. Reverse mortgages are being used as a one to five-year strategy as a more emotionally comforting approach for that person,” says Hickey.

Reverse mortgage loan payments can also be taken periodically, such as to pay ongoing accommodation charges, which could reduce the final loan balance significantly.

Paul Dwyer, owner of Melbourne and Peninsula Accommodation Bonds, says an accommodation bond loan product offered by Banksia Financial is starting to gain traction. Unlike the reverse mortgage it is for a fixed term of three or five years. A lump sum is paid directly to the aged care facility. The maximum amount available is $500,000 and up to 50 per cent of the security value.

Importantly, like reverse mortgages, there is a no negative equity guarantee, which means if the sale of the security property is not enough to cover the debt, the lender wears the loss.

The loan rate on the Banksia Accommodation Bond Loan is now about 8.05 per cent.

Another equity release scheme is the Bendigo Bank Homesafe Debt Free Equity Release, where home owners receive a cash amount in exchange for a fixed percentage of the future sale proceeds of a home.

Dwyer says the Bendigo Bank product may not be regarded as being suited for aged care because of the costs associated with preparing what could be a very short-term loan. One plus is that the bank undervalues the security when compared to other lenders, thus limiting adverse effects from property price reductions.

Other options

Lawton says aged care funding strategies often come down to the level of a person’s assets after the bond payment as well as cash flow. Often the aim is to reduce the income tested fee.

Where there are assets left over after the sale of a home it may work to use a family trust to mitigate the impact of any income tested fee. The trust could invest in investment bonds which are exempt for income test purposes but are a growing asset.

Another strategy is to invest the excess money in income streams, which are Centrelink and age care friendly.

An income is paid over a person’s lifetime or certain term but only a portion of the income is counted for Centrelink purposes.

“Where people don’t think they can afford high care extra services there may be ways to help cover the cash flow of the higher costs,” Lawton says.



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