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Aged Care interest rate increasing – impact on fees
Article published on: 28-03-2023
Some new entrants to aged care are set for an increase to daily accommodations fees. The Maximum Permissible Interest Rate (MPIR) increases to 7.46% from 1 April. This is an increase from:
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7.06% for the March 2023 quarter, and
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6.31% for the December 2022 quarter.
The increase could make payment of a lump sum accommodation fee more attractive. However, it’s not always possible for a resident to pay the full balance of a lump sum, which may make ongoing fees more expensive. Particular strain may be felt by certain Age Pensioners, including those who are homeowners and self-funded aged care residents, with limited access to capital, whose main asset is the family home. It is important to understand who the MPIR increase will impact, including the potential implications on the fee payment options and clients’ cashflow position.
Note: Clients who have already entered aged care will not be impacted as the MPIR applicable at the time of entry continues to apply. However, new entrants to care may be impacted by the rate increase.
Which clients may be impacted?
The MPIR increase may impact clients entering care on or after 1 April 2023 who are:
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self-funded residents who pay a Daily Accommodation Payment (DAP), or
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partially supported residents who choose to pay some of their accommodation contribution as a Refundable Accommodation Contribution (RAC).
The MPIR increase has a different impact on self-funded aged care residents than it does partially supported residents. Whether a resident is self-supported or partially supported is based on their means at their date of entry to care.
Changes to the MPIR after entry to care do not impact existing residents, as the rate is determined at their date of entry.
Impact for self-funded residents
For new residents who are self-funded and paying the published rate, the higher MPIR means an increased DAP if some or all of their accommodation fee is paid as a daily amount. Put simply, the DAP is interest payable at the MPIR rate on any unpaid lump sum Refundable Accommodation Deposit (RAD).
The table below shows the impact of the MPIR increase on the equivalent daily and yearly accommodation fees for different levels of RAD.
RAD payable
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December 2022 quarter
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March 2023 quarter
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1 April – 30 June 2023
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Daily
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Annual
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Daily
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Annual
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Daily
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Annual
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$550,000
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$95.08
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$34,705
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$106.38
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$38,830
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$112.41
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$41,030
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$450,000
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$77.79
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$28,395
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$87.04
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$31,770
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$91.97
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$33,570
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$350,000
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$60.51
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$22,085
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$67.70
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$24,710
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$71.53
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$26,110
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Impact for partially supported residents
For partially supported residents, the MPIR increase reduces the lump sum RAC payable (should the resident choose to pay some or all of their accommodation contribution as a lump sum RAC). This is because:
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the Daily Accommodation Contribution (DAC) is based on the resident’s calculated ‘means-tested amount’, and
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the equivalent lump sum RAC is then determined based on the MPIR
(RAC = (DAC x 365) ÷ MPIR)). Based on the maximum DAC (currently $65.49), the maximum RAC payable would be $320,427 (down from $326,432 for the March 2023 quarter, taking into account the rates and thresholds that applied at that time).
This is a complex area of aged care advice and is explained in detail from page 17 in our Guide to Aged Care Fees and Rules.
Advice considerations and implications
Clients who have already entered aged care will not be impacted. However, for new entrants to care, payment of a lump sum accommodation fee could be more attractive. That said, lack of access to capital may mean that where a lump sum RAD can’t be paid in full by a self-funded resident, the more expensive daily cost of care may need to be paid.
While a RAC is calculated differently for a supported resident, the reduction in the RAC will also make it a more attractive option for residents.
When determining how to pay this amount, consideration should be given to:
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other investments and net returns
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transaction costs and taxes involved in disposing other assets to pay a lump sum fee (including capital gains tax)
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life expectancy in care, and
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estate planning arrangements.
Where other funding options are considered, including having family help fund aged care fees and accessing home equity products (such as the Home Equity Access Scheme) advice should carefully consider the appropriateness of these arrangements. For more information, see:
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