Aged Care Interest Rate set to hit 11 year high

Whether you are an investor or borrower you will know that rates are rising. On 1 April the aged care interest rate (known as the Maximum Permissible Interest Rate or MPIR) is set to increase to 7.46%. It’s the sixth consecutive rise since October 2021 when the rate was just 4.01%p.a.

The new rate applies to people who enter aged care from 1 April and residents who move to another home. Existing residents who are paying the market price for their accommodation will also be subject to the new rate if they choose to move rooms in their current aged care home.

The aged care interest rate is set by the government and used to determine 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 an asset test and an income test. The aged care interest rate is used to calculate the lump sum equivalent of their daily payment. The increase in the aged care interest rate means that the equivalent lump sum is lower for new residents than existing residents. 

Let’s look at Jack and Shirley, a couple who entered aged care separately. They both receive the full Age Pension and have combined assets of $200,000.

Jack entered aged care in November 2021, based on his assets and income Jack’s daily accommodation contribution is $20.67/day and his equivalent lump sum is $187,656

Shirley is moving into aged care next week, her daily accommodation contribution is the same as Jack’s ($20.67/day) because her income and assets are the same. But her equivalent lump sum is almost $87,000 less at $100,856.

Market Price Residents

For residents who pay the market price for their accommodation the aged care interest rate is used to calculate the daily payment on any unpaid lump sum (known as a Refundable Accommodation Deposit or RAD). The change to the rate means that an aged care bed with a Refundable Accommodation Deposit (RAD) of $550,000 had an equivalent daily payment of $60/day ($22,055/year) in October 2021, from April that same bed will have a daily payment of $112/day ($41,030/year). 

The change in rate affects existing residents who move rooms or to another home. Think about Sally who entered aged care in December 2021, the aged care facility she lives in is opening a new wing in April. Sally’s current room has a price of $500,000 which she is paying by a daily payment of $55/day, the new room which is bigger, has a private patio and is bathed in light as it faces north has a price of $750,000. If Sally chooses to pay for her new room by DAP the price will be $153/day. Sally’s cost has increased so significantly because of the combination of the higher priced room and the higher interest rate.

When the aged care interest rate goes up lump sums can seem like the obvious payment option but there is much more to consider. 

Possibly the biggest decision will be whether to keep or sell the family home. This can be a hard decision for sentimental reasons. Financially speaking, keeping the home can have benefits because 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. 

While selling the home often means that you can free up the funds you need to pay a RAD, reducing or eliminating the DAP cost, it can come with unexpected consequences. You can reduce your pension (a potential loss of up to $27,664/year) and you can also increase the means tested care fee you need to pay (a potential cost of up to $31,707/year)

Aged care decisions are complex, you don’t want to end up “robbing Peter to pay Paul”, seeking advice from a Retirement Living and Aged Care Specialist ensures that you understand your options and there are no nasty surprises down the track.