Why higher interest rates could make aged care more expensive

Our Private Client Adviser and Aged Care Specialist, Dan Marks, recently shared this piece from Aged Care Steps, whose expertise in aged care planning informs the advice we provide to clients and their families.

If you’re starting to explore residential aged care for yourself or someone you love, you’ve probably noticed that accommodation costs can seem quite daunting. In fact, the average room price in Australia is now around $570,000. Prices have risen significantly over the past 18 months.

The good news is that you may not need to cash your investments or find the full amount as a lump sum.

Understanding your payment options

When you move into residential aged care, you will choose how to pay for your accommodation. You have three options. You can pay the full amount as a lump sum, known as a Refundable Accommodation Deposit (RAD). You can pay a Daily Accommodation Payment (DAP). Or you can choose a combination of both.

How interest rates affect what you pay

If you choose the daily payment option, a government-set interest rate determines the amount you pay. This rate is called the Maximum Permissible Interest Rate (MPIR). It works by converting the lump sum into a daily fee. When official interest rates rise, the MPIR rises too. It currently sits at 8.43% per annum. That is considerably higher than just a few years ago.

The rate locks in when you enter care, unless you move rooms. However, higher current rates may change how families think about affordability and funding. A strategy that made sense when interest rates were low may no longer be the most cost-effective approach today.

Under the current rules, you also need to consider inflation-linked indexation. This applies every six months if you choose the daily payment option.

The choice is always yours

One of the biggest misconceptions we still encounter is that the aged care provider decides how you pay for accommodation. Providers can set the room price, and some may prefer a lump sum. However, the choice is yours.

You have the right to choose whether to pay a lump sum, a daily payment, or a combination. Most people start with a daily payment. After entry, they can pay the lump sum in full or in part at any time.

These decisions can significantly affect your cash flow, Age Pension, investments, and the value of your estate. For that reason, it’s worth seeking advice before you commit.

Every family’s financial situation is different. Understanding your options helps you develop a strategy that suits your circumstances. That can help you make the most of your available resources. It can also provide greater peace of mind during what is often a significant life transition.

The right advice won’t change the interest rate. What it will do is help you find the funding approach that works best for your situation.

We offer licensed and specialist aged care advice to help you make the right choices. If you’d like to talk through your situation or understand your next steps, introduce yourself.

This article was prepared by Aged Care Steps Pty Limited (ABN 42 156 656 843, AFSL 486723) and is reproduced with permission.