New aged care loan for retirees
Home equity release specialist, Australian Seniors Finance (ASF), has launched an aged care loan (a type of reverse mortgage), designed to cater to retirees who want to keep the family home when they move into aged care.
ASF director, Martin Lynch, says more financial planners and finance brokers have started offering advice on aged care accommodation since the government made changes to aged care policy in July last year introducing greater flexibility into the system.
Macquarie Bank made a similar move last year, re-entering the reverse mortgage market after an absence of more than five years. Macquarie said it was responding to demand from brokers, who were especially keen to have an aged care accommodation loan to offer their clients.
As a result of last year’s changes to aged care policy people have more choice when making payments for their aged care accommodation.
Residents who are eligible to pay for accommodation can do so through a daily accommodation payment or a refundable accommodation deposit, or a combination of the two.
An annual cap of $25,000 applies to a resident's means tested care fee, together with a lifelong cap of $60,000 (indexed).
The government also strengthened the means testing arrangements for people entering residential care.
Mr Lynch says greater flexibility means retirees and their families have more options to consider and are more likely to consult an adviser.
In a typical scenario, ASF will deal with a retiree looking at paying a refundable accommodation deposit (what used to be called an aged care bond) of $400,000 or more.
Mr Lynch says: “In the past the advice people received was usually to sell the family home and pay the bond.
“But now a planner might talk to them about keeping the family home, covering part of their aged care accommodation cost through the deposit and covering the rest with a daily accommodation payment.”
There are several reasons why a retiree might consider such an approach. The family home is usually an appreciating asset with concessional tax and social security treatment.
And if income from an aged care loan is used to pay a daily payment it will not be included in the income test for pension purposes.
Mr Lynch says another reason to consider a loan is to give the family some breathing space. “Recent research suggests that about 20% of people in aged care would be better of in self-care with some assistance. But once they have sold their home and paid the deposit they are stuck.”
Aged care loans work in much the same way as a standard reverse mortgage. They have safeguards against negative equity and can be taken as a lump sum or income stream. The big difference is that the owner rents out the property.
According to the latest reverse mortgage industry data, compiled by Deloitte, balances stood at $3.6 billion at the end of 2013, unchanged from the previous year. New loan settlements in 2013 were worth $302 million.
The average loan size was $86,000 and the 70 to 79 year old segment accounted for 48% of borrowers.
