Funding residential aged care


Home equity can play a big role in meeting aged care costs.

Some of your older clients – or clients’ parents – may need to enter residential aged care. The funding model is complex and the costs not insignificant. This article, proudly sponsored by Household Capital, explores this topic and details how home equity can be used to ease the financial burden.

While residential aged care is unlikely to feature on too many retirement bucket lists, it should. Too many retired – or soon to be retired – Australians assume they won’t need to enter aged care and don’t factor funding it into their planning.

For many older Australians, some support in their home is enough to allow them to continue living independently through most of their retirement years. However, many will experience cognitive decline, serious illness, or lose physical ability as part of the ageing process. This often results in the need for a higher level of care to be provided in a residential aged care setting.

That retirees are uncertain about aged care was evident from the results of a research project Household Capital undertook in conjunction with Your Life Choices earlier this year. Over 3,500 respondents indicated their concerns about the sector. It was a time when Covid outbreaks in aged care were grabbing headlines, which is reflected in the high proportion of respondents indicating Covid outbreaks as their major concern. The second most cited concern was cost.

When it comes to who should fund aged care, the response was almost split down the middle. Of this same cohort, 54 percent did not expect to self-fund their aged care needs, which suggests a large number of retired Australians are not prepared for the financial outlay required to enter aged care.

The fee models used by aged care can be complex and confusing. The Australian National Aged Care Classification (AN-ACC) funding model, which was introduced effective 1 October 2022, is designed to provide a more equitable distribution of funding and include independent assessments of residents. The detail of this funding model is of particular interest to the facilities themselves, as it outlines how they received funding; however, its advent is important to the extent that it has impacted total costs.

The AN-ACC is likely to increase the costs for your clients, particularly those who are self-funded retirees. As well as helping your clients understand the costs involved in residential aged care, it’s important to understand the range of strategies your clients – or their parents – can access to meet these costs.

The costs of aged care

For self-funded retiree clients – or someone who’s chosen not to disclose their income and assets – the costs of residential aged care increased in in line with the implementation of the AN-ACC funding model, effective 1 October 2022.

The AN-ACC has not changed the fact that there are several layers of costs and six-to-seven figure sums are often quoted in response to enquiries. The fees and costs are primarily a factor of the chosen facility and a means assessment of your client’s income and assets.

There are three main layers of cost – the basic daily fee, a means tested care fee and the accommodation fee. There are also several optional payments for additional services. The accommodation payment is where the big numbers come in, via the Refundable Accommodation Deposit (RAD) or Daily Accommodation Payment (DAP).

Accommodation fee

This covers the cost of accommodation in the aged care residence and its maintenance. The fee is set by the aged care facility and the amount paid will depend on the client’s means assessment. Income and asset amounts change with indexation on 20 March and 20 September every year and are up to date as at 20 September 2022.

If your client has:

  • income below $30,204.20 and assets below $55,000, the Australian government will pay their accommodation costs
  • income above $76,170.12 or assets above $186,331.20, the client needs to pay the full cost of their accommodation.

The higher their income and assets, the higher the fee they need to pay, via a Refundable Accommodation Deposit (RAD) or a Daily Accommodation Payment (DAP).

Refundable accommodation deposit (RAD) explained

A RAD is one way a client can pay the accommodation fee and is fully refundable when they leave the facility. Clients with assets over $55,000 need to pay an accommodation fee of some sort; those with assets valued over $186,331.20 need to make a full accommodation payment.

Your client’s home is assessed as an asset unless an immediate family member or carer had been living with them when they moved into care and is still living there. Quite often the family home is sold to fund a RAD; however if one member of a couple still needs to remain in the home, funding a RAD can be challenging.

Daily accommodation payment (DAP)

The alternative is the DAP, a daily fee calculated against the overall accommodation fee your client needs to pay. The cost is calculated daily and charged monthly; it includes an interest component calculated at a rate set by the government.

Basic daily fee

A flat fee paid by all residents to cover the daily living expenses and is set at 85 percent of the single person rate of the Age Pension. The government updates it on 20 March and 20 September each year in line with increases to the Age Pension. It’s currently $56.87 per day, or $20,757.55 per annum.

Means-tested care fee

The means tested care fee is an extra contribution that some people pay, as determined through a means assessment. The means assessment is not mandatory; however, if not completed, your client may have to pay the maximum means tested care fee until the annual and lifetime caps are reached, as well as paying the agreed room price. The means assessment examines income and assets.

The income assessed includes income support payments such as the Age Pension, deemed income from financial investments, net income from rental property and income from superannuation and overseas pensions[1].

The assets assessed include financial assets (such as cash, term deposits, shares and managed investments) as well as ‘other assets’. Other assets include household contents and personal effects (typically valued at $10,000), investment property, special collections such as stamps, coins or art works and superannuation balances. It also includes Refundable deposits paid for accommodation in an aged care home.

This assets test may also include part of the value of the client’s family home. If the family home is retained, a capped amount of $186,331.20 (at 20 September 2022) or the net market value of the home (if lower) is included in the assets assessment.

It is an ongoing fee towards the cost of your client’s personal and clinical care. Personal care includes help with bathing, dressing and grooming, while clinical care includes specialised nursing services or medication assistance.

The maximum means tested care fee is currently $358.41 per day and changes with indexation. The current annual means tested fee is a maximum of $30,574.33; once this government regulated annual cap is reached, nothing more needs to be paid in that year.

There is also a lifetime cap that applies to the means-tested care fee. Once your client reaches this cap, they cannot be asked to pay any more in means-tested care fees. The lifetime cap is currently $73,378.49. Annual and lifetime caps are indexed on 20 March and 20 September each year.

Aged care fees are updated on the government’s My Aged Care website[2] each time indexation is applied.

The role of home equity in funding aged care

Your clients can use their home equity to fund a RAD or DAP.  For many retirees, it may seem the only option available to fund aged care is to sell the family home. This may not be the best decision financially, emotionally or for their beneficiaries. It’s particularly challenging where one partner requires aged care but the other needs to retain a roof over their head.

The other issue with selling the home is that it’s a non-assessable asset for the Age Pension and a capped asset for assessing aged care fees. That could change if the home is sold.

Using home equity to fund aged care allows the family home to be retained. Where the LVR allows and it’s the clients’ preference, a RAD can be funded. Where there is insufficient equity to fund a RAD – some of which reach seven figures – the DAP can be funded and paid directly from the home equity funding provider to the aged care facility.

Case study one: Paying the DAP

Maggie was referred to Household Capital by a financial adviser specialising in Aged Care Advice. At the time of the referral, her husband was already in aged care and Maggie had just entered full time residential aged care. However, she strongly desired to retain her home. Maggie’s three sons equally hold enduring powers of attorney (EPOA) and they undertook the process on her behalf. They are all equal beneficiaries of their parent’s estate.

Maggie required $3,558 per month to pay the DAP. Her sons had been chipping in to pay it each month, but this was not a feasible long term solution.

Her financial adviser provided the sons with advice that they would be better paying the DAP rather than paying a large lump sum (RAD) that would necessitate selling the home against their mother’s wishes. The sons also wished to make some structural and cosmetic improvements to the home before it was sold.

The monthly care fees are drawn from Maria’s home equity and paid directly to the aged care provider. This gradual drawdown limits the amount of interest accumulating as interest is only paid on drawn funds.

Case study two: Paying a RAD

Anna is 80 years old and recently moved into residential aged care. She has two daughters, Sophie and Katy who are joint powers of attorney. Both daughters live in Melbourne’s eastern suburbs and finding a care facility close by so the family could visit daily was really important to them.

Together with Anna’s financial adviser, the family established a plan to fund Anna’s care using her home equity. The financial plan established the best way to pay for the care was to pay a lump sum payment, the RAD.

They also needed to draw a small amount to repair the house so it could be rented. The rent was a further income source which could be used to pay for other care fees.

Anna put in place a Household Loan for $280,000, with $250,000 used to pay for the RAD and $30,000 used to renovate the home and attract quality tenants.

People don’t wish to sell their family home for a myriad of reasons: sentimentality, a desire to leave their home to their children or because their partner still needs somewhere to live. Many people believe selling the family home is the only option to fund aged care, even if it’s not the best option for them or their family. However, if you have a client – or a client’s parent – who needs funding to access aged care but does not wish to sell the family home, home equity can provide the solution.


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