The $750,000 aged care room cost nobody warned you about — and the four ways you can pay for it

Bina Brown is a financial journalist with a long track record of writing for leading publications including The Financial Review, The Australian, CNN.com and respected websites such as SuperGuide and UNSW Business Think. After writing about aged care for more than two decades she established her business Third Age Matters which focuses on navigating the aged care system.

Ever since the government gave aged care facilities the green light to charge $750,000 for a room without seeking its permission, the cost of many rooms in aged care has become eye wateringly high.

The cost of an ensuite room in aged care is frequently the equivalent of the value of your three bedroom home. How you pay for that room is up to you.

The room cost is referred to as the Refundable Accommodation Deposit (RAD). It will also have an equivalent Daily Accommodation Payment (DAP), which is effectively an interest rate on the unpaid RAD.

It is a common myth that to move into residential aged care and pay the room cost, you must sell your house.

If you either don’t wish to sell it or can see that any sale may take a while, or the house may be left vacant, then there may be other options to access the money tied up in it.

Renting the house may be one option, however it will need to be rentable, and you will need someone to manage it.

An equity release loan such a reverse mortgage is another way of freeing up a lump sum payment for cash flow.

However, it is important to understand the costs and conditions of the loan and the impact any decision may have on any age pension entitlements and ongoing care costs.

Within the calculation of the cost of residential aged care, only a portion of the house counts towards the age pension for the first two years.

After two years, the full value of the house will count towards the age pension – which generally results in the reduction or loss of the age pension.

If someone is to remain in the house while another moves into care, that person is classified as ‘protected’.  The house is then exempt from the means tested care fee assessment.

However, there will still be decisions to make around how to pay for the room and care fees, and whether there is sufficient cash flow to cover the cost of care as well as the living costs of the person remaining in the house.

There could be a range of financial strategies to consider, based on personal choice and your assessable income and assets.

There are four options for the payment of the room cost. You can pay it as a lump sum; pay part of it as a lump sum and the rest as a daily accommodation payment; or pay the whole lot as a daily accommodation payment. A fourth option is to pay a part RAD and deduct the DAP from the RAD.

For example. If the RAD on a room is $750,000. You can pay the whole $750,000 and pay no DAP.

You could also pay nothing towards the RAD and pay the DAP, which is charged at the government set maximum permissible interest rate at the time (currently 7.96%). For a $750,000 room this would be $163.56 a day.

For instance, you could pay, say, $500,000 towards the RAD and pay a DAP of $54.52 a day (7.96% of $250,000).

From 1 November there is a retention fee of 2% a year on the RAD up to 10%. If you then elect to deduct the DAP from the RAD, the estate will receive less of the RAD when the room is no longer required.

Accommodation isn’t the only cost to consider – there will be daily care fees.

Bina Brown is a journalist and director of aged care solutions company Third Age Matters