Reverse Mortgage Loan Blog

SOMETIMES the difficult investment decisions are the ones that arrive at the most inconvenient times of our lives. We are talking here of the emergency dash travel bill or the outlays of a marriage bust-up or a move by a self-funded retiree into a retirement home when markets are taking a dip. Large lumps of money must be found when you would prefer not to have to do so.

One big bill can be an accommodation bond, a required interest-free loan from a retiree to a standard aged-care facility. Typically these are about $300,000 but they can range from $1 million in parts of Sydney and Melbourne to $130,000 in regional areas. By law it must be used by the home to improve building standards, and the quality and range of aged-care services provided.

The aged-care home is allowed to deduct monthly amounts, called retention amounts, from the bond for up to five years. The government sets the maximum retention amount, now $299 a month, an amount fixed at the rate applying at your date of entry. The balance of the bond is refunded to you or your estate when you leave the home.

There are various ways to pay an accommodation bond, including a lump sum, a regular fortnightly or monthly payment or a combination of a lump sum and periodic payments.

One way to pay is to borrow from the aged-care facility –the retirement home itself — while a second is to sell or borrow against the family home. Like any borrowing, several points need to be made. The debt is compounding through time and much depends on the interest rate.

At present the lending rate from an aged-care provider is capped at 7.13 per cent, or a little above a bank home-loan lending rate.

Rachel Lane, an aged-care specialist at Whittaker Mcnaught, suggests anyone appraising sources of funding should recognise several benefits and sensitivities in such a borrowing.

“First, the provider will usually not be taking a charge over the former property — a mortgage, for example — so it remains an asset of the borrower. The key consideration is whether a borrower can make the repayments.”

It’s a given among financial planners that seniors — those over 65 — hold the bulk of their wealth in the family home, often the only available asset that may be converted into cash for a retirement home bond.

“Very few retirees have ready access to the large funds required to secure an aged-care place, let alone pay for the care,” says Martin Lynch, head of RBS Reverse Mortgages.

Yet a sale of the family home may not be the best option; it can be upsetting for seniors who planned to leave it to their children and not the best way to go financially. Any excess funds that turn up as cash assets or generate an income can bust a retiree’s eligibility for an aged pension.

A second option is a variation on a reverse mortgage called an accommodation bond loan, which can allow a family to keep the house, pension and any rent.

Such loans are available to those over 60 who may borrow up to 40 per cent of the value of their home.

No repayments are required until the end of the loan’s five-year term when the principal, interest and charges are due. The borrower maintains ownership of the home and can rent it out to generate extra income.

“Accommodation bond loans offer seniors and their families time to organise their assets,” says Louise Biti from Strategy Steps, an adviser to financial planners. “Sometimes selling the family home is not the best financial decision and an appropriate financial plan is needed so informed decisions can be made.

“Seniors who sell their home are basically converting a non-assessable asset (their home) into cash. This can affect their Centrelink pension payments and may also prevent them from accessing lower aged-care fees.”

Lane says an aged-care resident who doesn’t pay their accommodation bond in full (but instead pays interest on the outstanding amount to the aged-care provider) is able to extend the asset test exemption on the value of their former home.

“In addition, any income received from the property (that is, rent) is exempt from the calculation of pension entitlements. If the rent is not needed to help meet the cost of care, it could be used to make payments to the loan. It is important that residents and their families seek advice from a specialist who can advise on the best strategy and options.”

Lane suggests many people consider reverse mortgages under crisis conditions, focusing on the need to come up with a lump sum of money to fund an accommodation bond.

“It is important to understand the longer-term ramifications of compound interest on debt and the impact of property value in the equation,” she says. “If property prices fall over the period of the loan the client is losing money both ways, in the borrowing cost and in the costs involved in keeping the house: insurance, rates, maintenance and, if rented, real estate agents.”

Biti agrees that seniors need to weigh up the alternatives available to pay the aged-care bonds and what effect each option may have on their aged pension, aged-care fees, income and personal tax, ability to generate income and cashflow.

“Whether the parent or family chooses to sell the home or to take out a product like a reverse mortgage, the ultimate decision has to be based on the bottom line,” she says.

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