Accommodation payments – options in times of uncertainty

The current uncertainty in the housing market, driven by COVID-19, has left many families confused about how to fund aged care fees. At Alteris Lifestyle and Care, we have seen an increase in calls from families worried about the need to sell during this time and asking about alternative options.

To assist, we’ve put together this article outlining the potential impacts and how a two-phase approach may help. We’ll also be running a webinar on this topic on Thursday 28 May.

RAD and DAP

For a resident of Means[1] a key financial consideration associated with the move to Permanent Residential Aged Care is the need to pay either a Refundable Accommodation Deposit (RAD), a Daily Accommodation Payment (DAP) or a combination of both.

For many potential residents and their families, selling the family home has been the preferred method of meeting these obligations. However, this may not be the best option in the current climate.

The usual approach of a single-phase strategy can be detrimental to both the resident and the aged care provider:

• The resident: The amount offered for the former home by potential buyers (if any), maybe well below what the resident and their family consider to be fair and reasonable.
•  The aged care provider: There are financial consequences of admitting a resident should they subsequently find themselves unable to pay their accommodation fees.

The alternative is to move to a two-phase strategy. This allows us to continue to tailor the Accommodation Payment strategy around the client’s level of financial assets and Centrelink/DVA pensions entitlements, whilst not requiring the immediate sale of the family home.

Effectively, this approach is a ‘buying time’ solution, ensuring that both short term needs and longer-term capital preservation objectives can be met.

The Accommodation Payment Strategy

All residents are able to elect how they wish to pay the accommodation payment – either a RAD, a DAP or a combination of both.  If they elect to pay a DAP, it can be paid from cashflow and/or deducted from the RAD if any lump sum amount has been paid.

The following table illustrates the equivalent daily amount. Given the scale of these daily amounts over a 12-month period, these could easily morph into a bad debt for the provider, should the resident have insufficient funds to cover these payments.

[2] Current Maximum Permissible Interest Rate (MPIR) 4.89%

A two-phase strategy can help

When confronted with this scenario, our specialist Alteris Lifestyle and Care Advisers often look to design a two-phase strategy. This enables the family to confidently move their loved one to a room of choice in their preferred facility, secure in the knowledge that they will be able to pay their fees in both the short and longer term, without the worry of having to sell in uncertain times.

Assuming the resident has enough available funds to part-pay a RAD and then have the remaining DAP deducted from this lump sum, this can provide security for an agreed period for both the resident, their family, and the aged care provider.

As you can see in the following table, by paying just 5% of the RAD and deducting the DAP from the outstanding balance, the accommodation fees will be covered for a year. This allows time for the second phase of the Accommodation Payment strategy to be considered and implemented.

For the second phase, there are several options that our advisers can work through. As part of the discussion paper we can compare the affordability over a 5-year period of various options, including:

• Making an additional RAD payment if a reasonable offer is accepted and the family home is sold
• Allocating rental income towards the DAP payments if the family elects to retain and rent the home
• Using equity release strategies that can provide regular cashflow and/or lump sum amounts to fund the longer-term costs
• Working with families to identify private family arrangement to fund the resident’s care needs while ensuring an equitable outcome for all involved over the longer-term
• Reviewing the scenario if the home qualifies as an “unrealisable asset” and how that would interact with the rules surrounding financial hardship

As you can see, there are many different ways to fund the longer term accommodation fee. Which is most suitable for each resident will depend on many factors. However, by using a two-phase approach, the resident and their family are able to take time to work out which will suit them best, without risking their ability to accept a place in their chosen facility or pay the fees as they come due.

Given all the uncertainties we are facing at the moment, this is great news for both the residents and the aged care providers.

[1]A Resident is considered to have “Means”, where their income and assets used to calculate their Means Tested Amount at the time of entry to permanent residential care is greater than the max accommodation supplement, currently $58.19 per day.