Cash-strapped retirees facing caveats on their homes may be better off with a reverse mortgage.
Older Australians are certainly feeling the impact of COVID-19, whether they're considering aged care or still able to live independently.
Many entering residential aged care face the dilemma of whether to sell assets in a sliding market to pay the refundable accommodation deposit, or go into debt.
Those able to stay at home with increased support are expected to revisit the various home equity release options – including reverse mortgages and the pension loan scheme – to cover any increased costs.
There are more than 1 million Australians receiving some form of government-subsidised home help. But those people and many others have also relied on family, friends and neighbours to help them in ways that they may now have to pay for, including home-delivered shopping and meals.
With property and sharemarket valuations taking a massive hit, now would not be the most rational time to liquidate assets to pay for extra help.
Where it is too hard and too isolating to cope more or less on their own, many older Australians are moving into residential aged care, either from their home or from hospital, in an unbelievably challenging time.
For her own personal protection and the protection of others, Margaret Jones* was last week fitted with a mask and gloves before she was escorted to her new unseen room in a Canberra aged care facility.
"In a scenario playing out in aged care across the country, family or friends have been banned from visiting until further notice."
Her clothing and furniture were delivered the day before and whisked away in similar fashion. Fingers were crossed that they went to the right room and they would fit. With two weeks' isolation ahead of her because of COVID-19 protections, Margaret will have plenty of time to unpack and sort things as she likes. Her meals will be delivered and staff will check in on her, but for the most part she will be on her own.
In a scenario playing out in aged care across the country, family or friends have been banned from visiting until further notice.
Margaret could have lived alone under similar conditions in her home of 40 years, without the help and with visitor restrictions. But with underlying health issues and early dementia, she saw the move to aged care as a positive for the longer term.
She had planned to sell her house to pay for the $550,000 quoted for her aged care accommodation. But restrictions on open homes and on-site auctions make it a less than ideal time to be putting a house on the market.
The accommodation component of aged care is quoted in the form of a refundable accommodation payment (RAD) that can be paid in full or as a daily accommodation payment (DAP) charged at the rate of 4.89 per cent, or a combination of both. A fourth option is to pay a portion of the RAD and use it to pay any remaining DAP. This reduces the RAD over time, meaning less is refunded at the end.
With the sale of her house now on hold and no other assets of note, Margaret has little choice but to pay the DAP, adding a further $31,000 a year to the care component of her aged care bill of $39,000 a year.
That’s a lot more than the $54,000 she gets in pension incomes, forcing her to eat into the cash savings she has until the property market rebounds.
Where it makes sense to sell a property to raise the necessary funds for the RAD, many care homes have in the past been prepared to accrue the DAP until the house is sold, knowing they would probably get their money within six months.
With property markets running hot in recent years it hasn’t been much of an issue.
But caution in the present circumstances has seen some facilities – including Margaret's – allow for the DAP to accrue, provided the facility operator can put a caveat on her home.
A caveat acts as a warning or formal notice to tell the public that there is an interest on the land or property for a particular reason.
While the caveat doesn’t prevent the property from being sold, the sale can’t be settled until the caveat is lifted.
The view of one real estate agent is that provided the caveat is removed at settlement, it shouldn’t be a problem.
But reverse mortgage specialist Paul Dwyer, director at Team Australia Mortgage Solutions, says the caveat could preclude the property owner from accessing an aged care loan to pay the DAP – which may be an alternative in the present environment if you don’t want to sell your house at a discount.
If you think the value of your property has dropped by $80,000 as a result of COVID-19, then paying $2000 interest to borrow $30,000 for the DAP for a year might be an option.
Dwyer believes credit options are often overlooked in aged care. Financial advisers operating in the aged care space will have an Australian financial services licence to discuss various payment options, but not the necessary Australian credit licence needed to talk about many of the lending options available.
Falling property prices along with a slump in share prices and cuts to income could be a significant driver behind a lift in aged care loans and reverse mortgages to pay for aged care, says Dwyer.
Borrowing money and paying about 6 per cent interest to pay the $74 a day daily accommodation payment relevant to a $550,000 RAD will look like a small amount a year if house prices drop substantially and it takes a year to even look like coming back to a level you’d want to sell at, he says.
Dwyer adds that even before the COVID-19 crisis, DAPs were more prevalent than RADs as a way of paying for aged care.
Big banks withdrew from the equity release space a few years ago, leaving specialist non-bank lender LaTrobe Financial, Heartland Seniors Finance, Household Capital and IMB to offer various aged care finance solutions. The government has also broadened its presence with its expanded pension loan scheme that allows eligible retirees access to the equity in their home.
While the pension loan scheme is an option, the maximum a single person can access is $472 a fortnight – hardly enough to pay $1036 a fortnight for a $550,000 room price.
Dwyer notes that higher upfront costs from two of these lenders means a lower interest rate from them loses its advantage, especially as aged care loans do not last as long as standard reverse mortgages.
Deloitte financial services partner James Hickey is a strong believer that reverse mortgages and the pension loan scheme are a good solution for the right customer in the right circumstances.
Only recently, the interest for reverse mortgages came from active retirees in their 60s and early 70s. Many were looking to travel and renovate their homes, as well as settle their debts and enjoy their new-found freedom without having to significantly tap into their superannuation or downsize their homes.
In today’s unprecedented times of social isolation, restricted travel and a need for extra help or care, interest may come from those wishing to avoid the risk of liquidating super and other savings not just to supplement a certain lifestyle, but to hang on to life itself.
*Not her real name.
Original article on The Australian
Applications for credit are subject to eligibility and lending criteria. Fees and charges are payable and terms and conditions apply (available on request). Household Capital Pty Limited is a credit representative (512757) of Mortgage Direct Pty Limited ACN 075 721 434. Australian Credit Licence 391876.