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Selling the Family Home to Pay for Aged Care: What You Need to Know

Written by Michael Horin on . Posted in Blog.

The number of Australians aged 85 and over is predicted to triple in the next 35 years. As Australians live longer, more and more will end up in Residential Aged Care with the number of beds required in facilities expected to increase from 225,000 today to 700,000 in 2050.

Whilst children may consider their parents to be many years away from needing aged care, the reality is that circumstances can change very quickly. When the time comes to assist parents with a move into care, expensive decisions must be made in a short time frame and often in a highly stressful and emotional state. Because of this, it is critical that aged care advice is sought to avoid paying more than necessary for Residential Aged Care both upon entry and on an ongoing monthly basis.

Understanding RAD and DAP in Aged Care

When entering aged care, families have the option to pay a large up-front refundable fee, called a Refundable Accommodation Deposit (RAD, formerly known as a bond) – which in some facilities may be over $1 million – or alternatively, a daily fee known as a Daily Accommodation Payment (DAP). To calculate the DAP, facilities multiply the unpaid RAD by the MPIR (maximum permissible interest rate) that is set by the federal government.

From the start of 2021 to today, this interest rate has risen from 4.01% to 8.36%, which has had a dramatic impact on the way that families are choosing to fund their care. In 2021, when interest rates were 4.01%, the payment on an $1 million RAD was $40,100 a year, or $109.86 per day. Now, with interest rates at 8.36%, that annual figure has more than doubled to $83,600 or $229.04 per day.

During these times of lower interest rates, many families opted to pay the DAP as they were earning a greater return on their investments. Now, with the rate at 8.36%, most are attempting to raise the funds to pay the full RAD and avoid the incredibly high interest – but this may have unintended consequences.

The Hidden Impact of Selling the Family Home

It is quite common for those requiring aged care to be asset-rich and cash-poor, with their main asset being the family home. As a result, to fund the lump sum RAD, many families automatically choose to sell the family home to pay for aged care without full consideration and understanding of the potential repercussions. Most don’t realise that this decision has important implications for the fees payable and government entitlements received.

How the Means Test Affects Aged Care Costs

Aged care facilities generate roughly 10% of their revenue from the fees they charge residents, with the other 90% coming from the federal government. The government pays the home up to ~$420 a day per bed that is occupied. Centrelink then assesses the resident’s assets and income via a Centrelink Means Tested Fee (MTF) to determine how much they must contribute towards this cost – in addition to the RAD/DAP payable.

For the purposes of this Centrelink Means Tested Fee, the family home is counted as an asset; however, its value is capped at around $200k, regardless of what it may be worth on the market. If the home is sold, the full proceeds from the sale are included in the means test, and the amount that a resident is required to pay may increase dramatically. This demonstrates the real impact of selling the home on the aged pension and aged care contribution.

As an example, if a home is sold for $2M to fund the RAD, Centrelink will consider the resident’s assets to have increased by $1.8M. For families unaware of how the aged care pension asset test works, this could lead to a significant increase in ongoing fees.

Keeping the Home: The 2-Year Pension Rule

On the other hand, for the purposes of the Australian Aged Pension the home is exempt for calculations for 2 years after a resident moves into care. From year 3 onwards the home is no longer considered a principal place of residence and instead considered an investment property, often resulting in the loss of the pension. However, if the home is sold when a resident enters care, this non-assessable asset is turned into a fully assessable asset which can have a significant impact on the pension and may eliminate all entitlements.

However, if the home is sold when a resident enters care, this non-assessable asset is turned into a fully assessable asset, which can have a significant impact on the pension and may eliminate all entitlements. This is why families must carefully evaluate the impact of selling the home on the aged pension and how it might affect both income and aged care costs.

To make matters even more complex, the lump sum funds used to pay the Refundable Accommodation Deposit are excluded from the pension asset test but included in the asset test for the Centrelink Means Tested Fee – adding yet another layer of complexity to an already difficult decision.

To make matters even more complex, the lump sum funds used to pay the RAD are EXCLUDED from the asset test for the purposes of the pension but INCLUDED in the asset test for the purpose of the Centrelink Means Tested Fee.

Why Advice Matters Before Making a Decision

As a result, while selling the family home to pay for aged care and eliminate the DAP may seem like the appropriate choice on face value – there are many aspects to consider before making such an important decision. Before moving into aged care, it is vital a family seeks aged care advice to ensure that any decisions made will not have unintended consequences and will result in the best financial outcome.

For a deeper breakdown of the financial considerations involved, read our complete guide to aged care costs in Australia.

Need guidance tailored to your situation? Contact us today to speak with an aged care specialist who can help you make the best decision for your family.

FAQs

  1. What is the difference between RAD and DAP in aged care?

When looking for a room in a residential aged care facility residents will be quoted a RAD price. The RAD, Refundable Accommodation Deposit, is the lump-sum price of the room that can be paid 1 of 3 ways:

  • The full RAD is paid up front – this is partially refundable (90% of more) when you leave the facility and guaranteed by the federal government 
  • A Daily Accommodation Payment (DAP) is paid in the form of daily interest payments 
  • A combination of the RAD and DAP is paid
  1. Should I sell my family home to pay the RAD?

This is the most common question we get asked and the short answer is, not necessarily. The family home is often a couple’s most valuable asset, and many advisers wrongly assume that it needs to be sold to provide funds for RADs. RADs can be paid via an up-front lump-sum payment, a combination payment or a Daily Accommodation Payment.

For the purposes of the aged pension the home is exempt for 2 years after a resident move into care. Then, from year 3 onwards the home is no longer considered a principal place of residence and instead considered an investment property. As a result, keeping the home can impact the pension.

On the other hand, for the purposes of the Centrelink means tested fee, the home is always counted as an asset, but its value is capped at just over $200,000. Therefore, when the home is sold and the full value of the home is included as an asset, the means tested fee is increased.

  1. How does the means test affect my aged care costs?

Some of the ongoing monthly fees paid for aged care are means tested. These fees are set by the government and collected by the aged care facility based on an asset & income test for the resident. It is an attempt by the government to ask residents with the financial capacity to contribute to the cost of care. 

This fee can range from $0 to over $101 per day, but it is capped at $130k per person or 4 years, whichever comes first.

The amount of means tested fee you will be required to pay is reviewed monthly so it’s important to keep Centrelink up to date with changes in your financial circumstances. 

  1. Will I lose the pension if I sell my home to fund aged care?

The RAD is an excluded asset for social security purposes and is not assessed in the pension calculation. Therefore, in some cases, where existing cash is used to pay for a RAD, it can result in a new or increased pension entitlement.  

In addition, for the purposes of the pension the home is exempt for 2 years after a resident move into care. From year 3 onwards the home is no longer considered a principal place of residence and instead considered an investment property, which may result in the loss of the pension. 

If the family home is sold to fund the RAD the proceeds from its sale are counted as an asset. The cash remaining after paying the RAD can often result in a pension being reduced or lost entirely. This is why it’s so crucial to get advice before deciding to sell the home when moving into care as it can adversely impact pension entitlements and aged care fees.

Want expert guidance on aged care costs and payment strategies?
Read our Complete Guide to Aged Care Costs in Australia to explore your financial options.
For personalised support, contact our Melbourne aged care advisors today for a free, no-obligation consultation.

Note: Figures are accurate as of the publication date

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