Over the last 2 years the aged care interest rate has more than doubled and so has the value of retirement village buybacks.
You see, unlike most property transactions, after you leave a retirement village the operator can be required to buy your home if it hasn’t sold within a certain amount of time. It’s called a guaranteed buyback. It’s a bit like insurance, if your home sells then you have no need for the buyback and you get your money when it settles, but if it doesn’t sell then the village operator buys it back from you.
The conditions under which you are entitled to a buyback and the time limit are specified by state-based legislation. Broadly speaking, the timeframe ranges from 18 months in South Australia and Queensland to no mandatory buyback (except if you’re moving into aged care) in Victoria. In New South Wales there is a 6-month buyback in metropolitan areas and 12 months in regional areas.
While legislation sets the conditions and time limits for buybacks, you can find villages that will give you a shorter buyback period or that will give you a buyback when the legislation does not require it. In some cases the timeframe will depend on the contract you choose, buybacks can be as short as 3 months where no buyback is required.
What is a buyback worth?
Most people who move into aged care pay the market price for their accommodation. The market price typically starts around $500,000 in metropolitan areas but can go as high as $3 million if you have views of Sydney Harbour. These prices are based on the lump sum amount, known as the Refundable Accommodation Deposit or RAD.
If you don’t pay your accommodation deposit in full then you pay interest on the unpaid amount at the government set rate. The aged care interest rate has gone from a low of 4.01%p.a in October 2021 to 8.15%p.a from October 2023. The interest is charged daily and is called a Daily Accommodation Payment or DAP. Most people pay at least some of their aged care accommodation cost by daily payment when they first move in because they are waiting for assets to be realised (the biggest one being their home).
Let’s look at an example.
Shirley moved from a retirement village into aged care in November 2021. The price of her aged care accommodation was $500,000 and her exit entitlement from the retirement village was $400,000, but her home wasn't selling.
Her buyback was 18 months, so while she was waiting for the $400,000 to be refunded she paid a Daily Accommodation Payment (DAP) to the aged care home of $44 per day. If her home doesn’t sell and she waits 18 months for the $400,000 she will have paid just over $24,000 in Daily Accommodation Payment (DAP).
Now let’s look at the scenario if Shirley was moving from the retirement village into aged care today.
On the $400,000 that Shirley hasn’t paid she would need to pay a Daily Accommodation Payment (DAP) of $89 per day to the aged care home. If her home doesn’t sell and she waits 18 months for the $400,000 to be refunded she will pay almost $49,000 in Daily Accommodation Payments (DAP).
The value of Shirley’s buyback is $25,000 more today than it was 2 years ago. Of course no one is going to move into aged care before they need to and it is impossible to know what the aged care interest rate might be when you are leaving a village. But that doesn’t mean you shouldn’t be doing some back of the envelope numbers. Historically the aged care interest rate has been as low as 4.01%p.a and as high as 11.75%p.a, so the current rate of 8.15%p.a is a good mid point.
If you are weighing up different payment options for a particular home in a village or comparing a home in one village with another the buyback conditions and timeframe should be part of your consideration.
Let’s say you are comparing a village that will give you a 3 month buyback with one that will give you an 18 month buyback. If your exit entitlement from the village will be $400,000 then on the current aged care interest rate of 8.15%p.a the 3 month buyback could save you $40,750 compared with the 18 month buyback.
If your exit entitlement is higher, let’s say it will be $1,000,000 then the difference between a 3 month buyback and an 18 month buyback would be $101,875 – a substantial amount of money!
When you are thinking about moving into a retirement village the last thing on your mind is what happens after you leave, but it’s something you need to think about. A Village Guru Report can help, by showing you the village costs ingoing, ongoing and outgoing together with an estimate of your Age Pension and Rent Assistance entitlements and Home Care Package fees.