Over the past three years, the aged care interest rate, known as the maximum permissible interest rate (MPIR), has more than doubled.
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The aged care interest rate applies to any amount of unpaid refundable accommodation deposit (RAD) and is set on the date you move into aged care.
Changes to the interest rate don't affect existing residents unless they move rooms or to another aged care home, but they do affect the price of the daily payment for new residents.
In June 2021 the aged care interest rate was 4.01 per cent per annum, now it is 8.34 per cent per annum.
Someone who moved into a $500,000 aged care bed in June 2021 has a daily payment price of $55 per day while today that same bed has a price of $114 per day.
This increase to the cost of aged care accommodation payments has made retirement village buybacks more valuable.
Unlike most other property transactions, retirement village operators are required to buy your home if it hasn't sold within a certain period after you leave, it's called a "guaranteed buyback".
The buyback functions much like insurance in that if your home sells within the timeframe, you receive the proceeds upon settlement.
If it doesn't sell within the timeframe, then the village operator buys it back from you.
The amount of your guaranteed buyback is your exit entitlement amount, the amount you would otherwise receive if the home had sold.
This is normally calculated based on the amount you paid to purchase your home minus any exit fee.
There can also be marketing fees, sales commissions and sharing in capital gain or loss as part of the calculation.
Where the value of your exit entitlement includes some or all of any capital gain or loss you will likely need an independent valuer to determine the value.
The minimum timeframes and conditions of buybacks are dictated by state based legislation.
Generally speaking, the timeframe ranges from 18 months in South Australia and Queensland to no mandatory buyback in Victoria (with some exceptions if you're moving into aged care).
In NSW, the buyback period is six months in metropolitan areas and 12 months in regional areas. While in Canberra it is six months.
While the legislation sets the minimum standards and conditions under which a guaranteed buyback must be provided, some villages offer shorter buyback periods or provide buybacks even when not required by law.
In some cases, the timeframe depends on the contract you choose, with buybacks potentially as short as three months where no buyback is mandated.
![Predicting the future is impossible, but you can make it easier on yourself understanding financials. Picture Shutterstock Predicting the future is impossible, but you can make it easier on yourself understanding financials. Picture Shutterstock](/images/transform/v1/crop/frm/pMXRnDj3SUU44AkPpn97sC/03c6316c-f11b-45ec-87fd-4af17c54d7ee.jpg/r0_343_6720_4136_w1200_h678_fmax.jpg)
How to value a retirement village buyback
Most people entering aged care pay the market price for their accommodation, typically starting around $550,000 in metropolitan areas and reaching up to $3 million for prime locations like Sydney Harbour.
It is your choice whether you pay for the cost of your aged care accommodation by lump sum, daily payment or a combination of the two.
The daily accommodation payment (DAP) is simply interest on any unpaid refundable accommodation deposit at the government set rat, currently 8.34 per cent per annum.
Many people initially pay at least part of their aged care accommodation cost by daily payment while they are waiting for their assets, primarily their home, to be sold.
Let's look at an example: Betty moved from a retirement village into aged care in June 2021. The cost of her aged care accommodation was $550,000, and her exit entitlement from the retirement village was $400,000.
However, her home didn't sell immediately and she needed to wait 12 months for her guaranteed buyback.
Betty used $150,000 of he investments to pay towards her RAD, paying the remaining $400,000 by DAP while she waited for her home in the village to sell. Betty's DAP was $44 per day.
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After 12 months Betty's home hadn't sold so she received her $400,000 under the guaranteed buyback.
During the year that she waited for her funds she paid just over $16,000 in daily accommodation payment.
Now, if Betty were moving into the same aged care home today: On the $400,000 she has not paid of her RAD, she would pay a DAP of $91 per day.
If her home didn't sell and she waited 12 months for the $400,000 to be refunded under the guaranteed buyback, she would pay almost $33,500 in DAPs.
Put simply the value of Betty's 12 month buyback is $17,500 more than it was two years ago. Of course, no one enters aged care before they need to, and predicting what the aged care interest rate is going to be if you need to move into aged care in the future is impossible.
However, understanding the financial dynamics is important. When most people are moving into a retirement village the last thing on their mind is what happens after they leave.
Paying attention to how much you will get back and how soon after you leave can help make the next move more affordable.
- Rachel Lane has specialised in retirement living and aged care for 20 years, she is the principal of Aged Care Gurus and the co-author of Downsizing Made Simple.