To sell or not to sell the family home?
That’s the million-dollar question when elderly parents move into aged care.
It is a complex financial decision and one that often needs to be made quickly at a time when emotions are running high. “The old strategy undertaken by most – sell the house, pay the bond, keep the pension and cover the fees – is no longer a given”, say Equity Trustees.
The aged care reforms which came into effect on July 1 have changed decision-making. Under the new rules everyone entering aged care must pay a bond, either as a lump sum up front, a rental-type payment set at 6.7 per cent of the value of the bond, or a combination of the two. “For most people selling the home is still the best choice, but if the home is worth significantly more than the bond it starts to be viable to keep the house (and rent it out)”.
Unfortunately, there is no rule of thumb to work out when it is worth holding onto the family home.
The sums will be different for everyone, depending on variables such as the house value, the amount of bond payable, and the value of any other assets and sources of income.
Depending on the aged care facility selected, you also need to factor in a basic daily fee for your everyday living costs such as meals and laundry, an additional means-tested care fee based on an assessment of your income and assets, plus fees for optional services.
The way the new means test works could also tip the scales in favour of keeping the family home. The means-tested care fee counts any up-front bond paid as an asset whereas only the first $154,179 of the value of the family home is counted. The value of the home is not the only consideration. You also need to consider whether it can be rented easily or if work needs to be done to make it ready.
This question is an important one because they would generally need rental income to help cover the aged care costs”. If the value of the house and the bond are roughly the same, you may not be able to generate enough rent to cover the cost of daily care.
However, the greater the value of the home the more attractive it becomes to hold onto it. Let’s assume the person going into care needs to fund a $400,000 bond. They are on the age pension and have $45,000 in savings. If their home is worth $700,000, they need to generate an after-tax annual rate of return (capital growth plus rental income) of 2.94 per cent to be better off keeping their home.
With average residential yields running at 2-3 per cent, the rent would just about cover accommodation payments. However, if their home is worth $300,000, they need a total return of 6.2 per cent a year. Because the rental income would fall far short of this figure, the family would have to pitch in to help fund the cost of care if they want to keep the home.
Estimates the cashflow shortfall at around $15,000 a year. If the family believes the house will grow in value at more than four per cent a year, they may be happy to do this.
Where an individual going into care is looking after their own cash flow, most will decide it’s simpler to sell. But he says family members typically look at the bigger picture. Even so, some families may decide they don’t want to be landlords or rent the home to strangers.
Decision-making about the family home is simpler when it’s is just Mum or Dad involved. Planning may be more complex if there is a spouse, an adult child or carer still in the home.
Couples – one in care
Where a couple is living off the age pension and one goes into care, the remaining spouse can stay in the home and stay on the pension. If they fall under the means test, half their combined assets and income will be assessed.
But if there is a carer left in the home, the Centrelink carer’s pension will stop.
In that case, the carer must decide whether to stay, take in a lodger or leave. The wishes of other family members may also need to be taken into account. Longevity is another aspect to consider.
“If a person is entering aged care at an end of life stage, selling property in a hurry to pay a lump sum shouldn’t be their focus. Ability to pay via daily payments, at least in the short term, takes the pressure off a family during an emotionally difficult time”.
“If it is the person’s wish to keep the home, and based on discussions and calculations it’s possible, then you can work out a way to achieve that.
If keeping the home is impractical and not a financially viable option then we would need to have that discussion too”.
PLAN OF ATTACK
So, the time has come for Mum or Dad to move into aged care. Before you enter into a fire sale of the family home, this is what you need to do:
- Find an aged care facility that offers the right standard and level of care
- Is it affordable? For anyone on a full age pension, 85 per cent of the pension will go towards the basic daily fee and nothing else is payable. Everyone else faces an income and assets test.
- What is your preference – keep or sell the house?
- Work through your financial options. Don’t rely on the aged care provider to do this. Consider seeking advice from an independent financial planner who specialises in aged care.
You have four weeks to make a decision about whether to pay a lump sum bond called a refundable accommodation deposit (RAD), a rental-type payment called a daily accommodation payment (DAP), or a combination of both.
Elizabeth Balmer, 89, has been living in the family home in Melbourne’s Pascoe Vale for almost 50 years. Until recently she was coping on her own and getting around on a frame, but a recent decline in health triggered the decision to move into aged care.
She and son Bryan Balmer have looked at three or four aged care facilities. “I want indicative advice about care but they all have sales people and they all want to talk about costs first”, says Bryan.
“Care comes first but I also want value for my investment. Mum is keen to have a place with social interaction, that’s a higher priority for her than the size of the room”, he says.
Elizabeth is keen to stay close to her family home and friends in an area she has lived in for more than half a century, but she is pragmatic about the house.
Like many women of her generation, she is adamant that she doesn’t want to be an imposition on the family. While she would prefer to ‘keep things tidy’ and sell, she is open to keeping the house if that works out better financially.
“I’m still not sure which is financially the better outcome”, says Bryan who is in the process of seeking specialist financial advice to help with the final sums. The family home has been valued at roughly $700,000, ‘so we’re in the lucky position to have choices”, says Bryan. However, if they sell the home and there is cash left over after paying a bond this may have an impact on the means-tested care fee she has to pay.
“We’re working our way through the new system. I know what I don’t know. People without professional advice would have trouble working out the best way forward”, says Balmer.
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