Transitioning to residential aged care often prompts the challenging decision of whether or not to sell the family home. This critical choice involves balancing sentimental value and financial considerations. Understanding the key factors influencing this decision can help to ensure the best outcome for you and your loved ones.


Moving into residential aged care is a significant life event, often accompanied by a mix of emotions and financial considerations. One of the main concerns for many Australians is whether or not to sell the family home to cover the costs associated with aged care. This decision can be particularly challenging given that the family home is not only a major financial asset but also holds sentimental value and may be seen as a legacy for future generations.

The necessity of selling the home to pay for aged care depends on several factors, including who currently resides in the home and what other financial resources are available. Additionally, the impact on Centrelink or Department of Veterans’ Affairs (DVA) payments must be considered.

Here are some important considerations when working out how to fund aged care:

Selling the family home

When financing aged care, the refundable accommodation deposit (RAD) is often the largest cost, and with current interest rates at 8.36% p.a. on unpaid RADs, families aim to pay this quickly[i]. However, funding the RAD, which can exceed $500,000, can be complex. When considering selling the family home to pay a RAD for aged care, there are several implications to review:

  1. Whilst selling the family home can eliminate the daily accommodation payment (DAP), some people may have sufficient financial assets, such as superannuation, savings, or shares, to fund the RAD without selling the family home. If this is an option, decisions about the home’s future still need careful consideration, especially regarding pension entitlements and aged care assessments.
  2. For pension purposes, Services Australia provides a two-year exemption period before including the home’s value in the pension assessment[ii]. Selling the home sooner forfeits this exemption, with the sale proceeds immediately counted, potentially reducing pension benefits. Therefore, it’s important to plan how to replace any lost pension income to maintain cash flow.
  3. In terms of aged care fees, the family home is assessed up to a capped value of $201,231.20 as of 1 July 2024[iii], from the moment you enter care. This capped value helps keep means-tested fees lower compared to the full market value of the property. Retaining the home allows it to be assessed at this capped value, beneficial if there’s no financial urgency to sell.

Loans from family

If financing aged care using the sale of the family home or other financial assets is not viable, some families may wish to use personal funds or pool resources. Here are three key implications of using family loans to pay the RAD:

  1. Refund process: When a person leaves care or passes away, the RAD is refunded to their estate, not to the family member who paid it[iv]. This can lead to unintended consequences, such as the Will determining fund distribution or implications for pension entitlements if refunded to a spouse. Legal advice and a clear family loan agreement are essential to outline repayment details.

  2. Asset assessment: Family loans are treated as assets by Services Australia, increasing the means-tested fees for the resident. While aiming to reduce interest costs is beneficial, it’s crucial to consider how this impacts other fees, as the loan is viewed as an additional asset, not offset by debt[v].

  3. Impact on the lender: The lending family member must consider their current and future financial situation before lending funds. Retrieving the RAD while the person is still in care can be difficult, so understanding these restrictions and planning accordingly is vital. A thorough assessment of immediate and future scenarios will help make informed decisions and avoid potential pitfalls.

Renting out the family home

When considering renting out the family home while in aged care, it’s crucial to understand both financial and non-financial implications.

  • Financially, renting can increase cash flow through rental income, but this also leads to higher means-tested fees and potentially reduced age pension due to the increased assessable income. Additionally, costs associated with preparing the property for rent, such as repairs and maintenance, need to be factored in. Ongoing expenses like agent fees, repairs, and taxes can further limit the net benefit to your cash flow, making it essential to ensure that the net rent and property growth exceed the Maximum Permissible Interest Rate (MPIR) of 8.36% to be financially advantageous[vi].
  • Non-financial considerations include determining who will manage the property. If a real estate agent is involved, identifying a contact person and manager of cash flow is necessary. Typically, these responsibilities do not fall on the person in care, and family members or close friends may lack the experience or willingness to take on these tasks. Understanding these factors comprehensively will help ensure informed decisions that support both immediate and long-term financial needs.

Family home scenario: worked example

John has chosen to move into a room with a $550,000 RAD. John is self-funded as his super puts him over the homeowner threshold for any government pension. He supports his cost of living by drawing the minimum 5% p.a. from his $800,000 super balance as a pension, which provides him with $40,000 p.a. His super fund on average earns 5% so his balance remains stable. His home value is $1.5 million, and he currently has $10,000 cash in the bank. For this example, the home exemption cap is assumed as $201,231.20 and the MPIR is 8.36%, which are both the 1 July 2024 figures.

John is weighing up the following three option:

Option 1: Keep everything as is and use his super to pay his aged care costs.

Option 2: Use his super to pay his RAD and apply for Centrelink in the first two years and hold onto his house for now.

Option 3: Sell his house, and use these funds to pay the RAD, and invest the residual. John does not want to rent his home, as he wishes to have access to it for himself and his family when required.

Scenarios

Assets

Option 1: Current

Option 2: Retain home and use super

Option 3: Sell home now and pay RAD

Home

$1,500,000

$1,500,000

Sold

Super

$800,000

$250,000

$800,000

Bank

$10,000

$10,000

$10,000

RAD paid

nil

$550,000

$550,000

Residual funds from the sale of the home

n/a

n/a

$950,000

Total assets

$2,310,000

$2,310,000

$2,310,000

Total assets for aged care

$1,011,231

$1,011,231

$2,310,000

Total assets for Govt age pension

$810,000

$260,000

$1,760,000

 

Aged care costs

     

Daily fee

$22,615 p.a.

$22,615 p.a.

$22,615 p.a.

Daily accommodation payment

$45,980 p.a.

nil

nil

Means tested fee

$13,399 p.a.

$13,399 p.a.

$33,309 p.a.
 (hits cap)

Total aged care costs

$81,994 p.a.

$36,014 p.a.

$55,924 p.a.

 

Expected income

     

Super pension

(5% p.a.)

$40,000 p.a.

$12,500 p.a.

$40,000 p.a.

Residual funds earnings (5% p.a.)

n/a

n/a

$47,500

Centrelink

$0

$29,024 p.a.

n/a

Total income

$40,000 p.a.

$41,524 p.a.

$87,500 p.a.

Surplus/shortfall

$41,994 p.a.

$5,510 p.a.

$31,576 p.a.

As shown in the above example, option 1 requires John to draw down on his assets due to high interest rates, impacting his ability to cover aged care and personal costs. Option 2 allows for time to decide on the home, benefiting from a government pension and lower fees initially. Option 3 improves cash flow through selling the home but increases means-tested fees, relying on consistent returns.

Making an informed decision

The decision to sell the family home to fund aged care is both financial and emotional. Therefore, it’s crucial to understand all implications thoroughly before making a decision. Consulting with financial advisers and legal experts can provide valuable insights tailored to individual circumstances.

Navigating the financial aspects of moving into aged care requires careful consideration and planning. Understand the regulations, assess your financial situation, and seek professional advice to make the best decision for yourself and your loved ones.

If you would like more information on aged care or further clarification on how to fund your next life stage, contact our office today.


DISCLAIMER: All information on Focus Wealth Advisers is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider your personal circumstances and seek professional advice before making any decisions based on this information.

[i] Health.gov (2024) Schedule of fees and charges for residential and home care from 1 July 2024

[ii] Services Australia (2024) Real estate assets

[iii] Health.gov (2024) Schedule of fees and charges for residential and home care from 1 July 2024

[iv] BT (2024) Payment for a parent’s residential aged care accommodation costs

[v] My Aged Care (2024) Understanding aged care home accommodation costs

[vi] Health.gov (2024) Base interest rate (BIR) and maximum permissible interest rate (MPIR) for residential aged care