Interest rates put the squeeze on aged care

Interest rates have been front and centre in the news this week. In one sense, that’s rather odd. After all, the Reserve Bank of Australia (RBA) has kept rates on hold since November last year. 

On the other, the RBA has done so in the face of mounting calls for a reduction in the official cash rate. Some experts claim the RBA is too focused on reducing inflation, and its stubbornness to reduce them threatens employment levels. Others say mortgage holders are unfairly bearing the brunt of its refusal to budge.

However, RBA Governor Michelle Bullock has remained resolute, to a point where she made a disturbing warning this week. “Some may ultimately make the difficult decision to sell their homes,” she said. 

The sentiment spells further difficult times ahead for struggling homeowners and the unemployed. But there’s another demographic that’s doing it tough – albeit indirectly – as a result of rates not falling. Those in aged care. 

In fact rising rates are putting the squeeze on those in aged care who chose to pay what’s called as a daily accommodation payment (DAP).

Interest rates and DAP

Australians entering aged care have a choice between two options when it comes to payment. They can pay upfront by what’s called the Refundable Accommodation Deposit (RAD). As a one-off payment, full payment of the RAD is immune to any future rate changes.

However, many people moving into aged care choose the alternative path – usually because financial circumstances give them no choice. That path is the DAP. This involves part-paying the RAD upfront, or not paying it at all. Instead, they will pay a daily rate, which is subject to fluctuations based on inflation. 

Unfortunately for those on the latter route, the DAP has been rising at a rate outpacing inflation in recent times. 

As recently as 2022 the DAP interest rate was 4 per cent. On July 1 this year, it rose from 8.34 per cent to 8.36 per cent, well over twice the interest rate of just two years ago. Translating that into monetary terms, it means those with a $1 million RAD is now paying $83,600 annually compared to $40,000 in 2022. 

Why the jump?

Like the rest of us, aged care facilities are feeling the pinch of rising costs. A lot of these aged care facilities – as many as half – are already running at a loss. As a result, something has to give. In this case it’s been the DAP interest rate.

It’s a tough change of circumstances for those who took the DAP direction rather than the RAD road in 2022. Hindsight is, of course, a wonderful thing.

What should you do in response to higher interest rates?

So what’s the best option now for those in that situation? Given the current DAP interest rate of 8.36 per cent is well above inflation, the RAD is now an attractive alternative. This could be a viable option for those entering aged care now, or those already in aged care paying DAP. The rules governing aged care mean you can switch to paying a lump sum later. 

But complexities surrounding this are many and varied. Paying the RAD upfront might necessitate the selling of your house, which brings its own pros and cons.

Another alternative for those already paying DAP is to contribute a part deposit payment. This would reduce the DAP payment.

Such an array of complexities makes obtaining financial advice paramount. If you’re in the aged care planning process or considering changing payment methods, seek advice from a registered financial advisor.

Do you believe you have enough for a comfortable retirement? Are increasing insurance costs affecting this? Let us know via the comments section below.

Also read: Retirement age for Aussies jumps

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