My mum is looking at a Reverse Mortgage to fund the $500k Refundable Accommodation Deposit (RAD) for aged care. If she pays the $500k RAD in full is this treated as an asset in the calculation of her age pension? Thanks.
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This is becoming a more common question, however, there are a few twists with regard to the implications.
For Age Pension purposes the Refundable Accommodation Deposit (RAD) paid is not an assessable asset as this is deemed to be an extension of your home and therefore gets the same exemption. The reverse mortgage debt has been used for a non-assessable purpose. Therefore, the debt does not have any ‘positive’ effect on improving the asset test. In essence, the act of borrowing $500k for the RAD and moving to aged care will not have an impact on the age pension asset test.
For aged care purposes, the RAD is an assessable asset. So the use of a reverse mortgage for the purpose of paying a RAD could have a negative impact on the aged care fee assessment. Depending on the broader financial position, this could have the effect of increasing the Means-Tested Care Fees payable to the aged care provider.
Always remember the payment of the RAD is optional, you can pay the accommodation by way of a Daily Accommodation Payment (DAP) calculated at a legislated interest rate (currently 5.7%). I expect this will be quite a discount on the reverse mortgage rates on offer.
Other strategies to consider are to use age pension assessable assets to pay some of the RAD. The RAD paid can then be used to fund the outstanding DAP payments, improving your assessments and helping with the cash flow. For example, if you paid $100k of RAD, the DAP would be approximately $62 a day ($400k x 5.7% / 365). As you draw down the RAD with these payments the DAP will go up; however, this scenario would fund the accommodation costs for several years.
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