Benefits consumers can gain from using a home equity release product to fund their residential aged care should console aged care providers concerned over losing lump sum bonds to daily accommodation payments, according to an aged care credit advisor.
Paul Dwyer from Aged Care Finance Solutions said that following the 1 July aged care reforms people using their home to pay for their aged care accommodation now need to decide whether they sell or use the equity in the home’s value.
One of the more significant changes is that the monies from the sale of the property, including any lump sum RAD payment [refundable accommodation deposit] and cash in the bank, will be included in the means test, he said.
“For those wanting to achieve the best financial outcome for the resident and the future estate, keeping the home and renting it will provide potentially better results,” Mr Dwyer said.
“The best outcome for both the facility and the resident is a loan to fund the majority of the RAD, which thereby leads to a small DAP [daily accommodation payment].
“The facility will continue to have significant RAD funds, whilst the residents will be able to receive rental income without affecting aged pension entitlements, nor its inclusion into a means-tested assessment.”
The age pension will not be reduced because the rental income and the house are exempt from the income test and for the means test, the value of the house is capped at $154,000.
Mr Dwyer said the number of bonded beds will nearly double over three years following the 1 July removal of the distinction between high and low care. Although some of those bonds would be replaced by DAPs, estimates indicate it would only be between 20 and 30 per cent, he said.
Equity release schemes for seniors
While many stakeholders continue to call for a government-backed equity release scheme as recommended by the Productivity Commission, but not implemented by the former Labor government, Assistant Minister for Social Services Mitch Fifield confirmed it was not something the coalition government was examining either.
Both major parties agree the private financial services sector should operate such schemes (see products compared below).
There are products currently available in the Australian market suitable for seniors to access the equity in their home but a majority do not provide its continuation when the house is unoccupied, Mr Dwyer said.
Senior Australians Equity Release Association (SEQUAL) is a peak industry body aiming to ensure high standards among those who offer equity release products for senior Australians.
SEQUAL Chair John Thomas said while current equity release options were limited for funding residential aged care, he believed more products would come onto the market to adapt to new needs.
“The aged care funding changes are only hitting the deck now and obviously providers will develop products that meet that need. I think there will be a lot more providers and a lot more products tailored to specific needs,” Mr Thomas said.
Now and in the future, Mr Thomas said he recommended seniors use a product from SEQUAL-accredited-members to be assured it met legislative and regulatory requirements.
Key principles include a guarantee for the homeowner to live in the home for as long as they want, a no negative equity guarantee, which means if borrowings exceed the value of the house, the homeowner/s or estate never have to pay more than the net sale proceeds of the house, and quotations with a calculator showing how the interest accumulates over years.
Equity release options for aged care compared
SEQUAL accredited providers include Macquarie Group, Australian Seniors Finance, Homesafe Solutions and Bankwest, all of which offer a product that can be used to fund residential aged care in certain circumstances. Another two, P&N Bank and Bluestone Equity Release, offer equity release products for seniors that can’t be used to fund residential care.
AAA takes a look at the products:
Macquarie Group’s accommodation bond loan is the only one directly marketed for aged care. It is available as a lump sum or monthly draw down, but rather than a reverse mortgage, it is a five-year term that is repayable at the end of the 5th year.
Mr Dwyer said Macquarie also offered a reverse mortgage product for seniors, which could be converted to an aged care extension if the homeowner needed to enter residential aged care.
The Bankwest Seniors Equity Release Mortgage is a variable rate product which can be used to fund aged care costs, said Ian Rakhit, Bankwest head of broker sales.
“It is a no regular repayment loan, with interest, fees and charges all capitalised on the loan. The maximum loan available is $250,000 with a minimum valuation of $200,000 and each applicant must be at least 65 years old,” he said.
Australian Seniors Finance
Australian Seniors Finance offers a Reverse Mortgage Home Equity Release product for people aged 60 and over, which includes options for lump sum payments, regular payments, cash reserve facility or a combination of all.
“We do have many customers that use the funds to pay for the care of one partner, whilst the other remains in the home,” said Julie Campbell, Australian Seniors Finance general manager.
However, the product is not suitable if the sole or remaining homeowner moves out of the home and into residential aged care.
“We are considering offering such a product in the future to meet the growing demand for accommodation bonds and the many benefits of maintaining the family home after moving into care both emotional and financial,” Ms Campbell said.
Homesafe Solutions’ general manager Dianne Shepherd said its offering, Homesafe Wealth Release, provided senior homeowners the ability to release the wealth tied up in their homes without taking out a loan or entering into a compounding interest arrangement.
“It operates as a shared sale proceeds arrangement where the homeowner receives a lump sum cash amount up front in exchange for selling Homesafe a share of the sale price of the home when it is eventually sold,” she said.
A homeowner is not required to sell their home if they move into a residential aged care facility after a contract has been entered into, and on the basis it was not the original purpose of the transaction, but the house needs to be tenanted via a lease agreement, Ms Shepherd said.
The product is not suitable for a new customer who is the only owner of the property and seeking to access the equity in their home for the express purpose of moving into residential care because the product is designed to be a long-term transaction.
However, it can be used by existing customers who move into residential aged care, or new customers where only one party is moving out of the home and into a care facility and one homeowner remains in the home, she said.
P&N Bank offers a reverse mortgage product called Easy Living Access Loan for WA homeowners only and who are aged 65 year or over. Corporate Communications Manager Kerrie Nayler said the product was aimed at supplementing retirement income and that it was not currently considering offering any products suitable for funding residential aged care costs.
Bluestone equity release
Bluestone Group general manager – Australasia Campbell Smyth said Bluestone was not currently writing a product suitable for funding a homeowner’s residential aged care accommodation costs but that it retained a significant back book of loans.