Whether you’re an investor or borrower, you would be very aware of the recent increases to interest rates. On April 1, 2023, the aged care interest rate (also known as the Maximum Permissible Interest Rate, or MPIR) increased to 7.46%. This marks the sixth consecutive rise since October 2021 when the rate was merely 4.01% p.a. The new rate applies to individuals entering aged care from April 1, 2023 and those who move to another residence.
Existing residents paying the market price for their accommodation will also face the new rate if they opt to change rooms within their current aged care home. The government sets the aged care interest rate, which determines the equivalent daily payment on a lump sum and vice versa.
Low Means Residents
For low means residents, their daily payment is calculated based on asset and income tests. The aged care interest rate is used to calculate the lump sum equivalent of these daily payments. Consequently, a higher interest rate leads to a lower equivalent lump sum for new residents as opposed to existing ones.
Consider Murray and Mary, a couple who entered aged care separately. Both receive the full Age Pension and have combined assets of $200,000. Murray entered aged care in November 2021; his daily accommodation contribution amounts to $20.67/day based on his assets and income, with an equivalent lump sum of $187,656. Mary will move into aged care next week (April 2023) with the same daily accommodation contribution ($20.67/day) due to identical income and assets. However, her equivalent lump sum is about $87,000 less at $100,856.
Market Price Residents
For residents paying market price for their accommodations, the aged care interest rate determines the daily payment on any unpaid lump sum (known as a Refundable Accommodation Deposit or RAD). With the rate change, an aged care bed with a RAD of $550,000 had an equivalent daily payment of $60/day ($22,055/year) in October 2021. In contrast, from April onwards, the same bed will have a daily payment of $112/day ($41,030/year). This rate change impacts existing residents who move rooms or to another home.
Consider Doris, who entered aged care in December 2021. Her facility plans to open a new section in June 2023. Doris’s current room costs $500,000, and she pays a daily fee of $55/day. However, the new room—larger, with a private balcony and abundant sunlight due to its north-facing orientation—costs $750,000. If Doris decides to pay for her new room through the DAP method, her fee will increase to $153/day. This significant cost increase results from both the higher-priced room and the increased interest rate.
What to do about interest rates?
When the aged care interest rate increases, a lump sum payment to cover the RAD might appear to be the obvious payment choice, but there are many factors to consider. One of the essential decisions will be whether to keep or sell the family home, which can be challenging due to sentimental reasons. Financially, retaining the home has its advantages, as it has a capped value of $193,219 for the aged care means test and a 2-year asset test exemption for calculating your Age pension.
Selling the home often allows you to access the funds needed to pay a RAD, thus reducing or eliminating the DAP cost. However, this decision may have unforeseen consequences. It can lead to a reduction in your pension (a potential loss of up to $27,664/year) and an increase in the means-tested care fee you must pay (a potential cost of up to $31,707/year).
Aged care decisions can be complicated, costly and not to mention, stressful. Seeking advice from an experienced Aged Care Financial Planner ensures that you understand ALL your options and can make the best, informed choice for your circumstances. You can contact us here.