A person’s home is their castle and any equity in it is the owner’s to use as they wish.
But the large amount of untapped wealth that is tied up in homes around the country has not gone unnoticed by the Government and others.
Two high profile reports as referred to below have raised the possibility that one way to help fund the rising costs associated with an ageing population, is to bring the family home into the equation when it comes to aged care.
New funding models
Both the Productivity Commission in its An Ageing Australia: Preparing for the Futureresearch paper 1 and The Grattan Institute in its Balancing budgets; tough choices we need report 2 , have raised the possibility of using the equity in one’s home to help meet the costs. A government equity release scheme where individuals contribute half the annual real increase in their home values towards aged care was the Productivity Commission’s suggestion. The Grattan Institute suggested wealthy retirees draw down some of the value of their owner-occupied dwellings before accessing the age pension.
People who failed the asset test due to the value of their dwelling would be allowed to receive the aged pension, but they would accumulate a debt to the government, to be paid when the home was transferred or sold.
Both schemes are not too dissimilar to existing reverse mortgage arrangements where a home owner can access the equity in their home for any number of reasons, repaying the amount when they leave or the home is sold.
Under current arrangements, a person moving into an aged care facility requiring an accommodation bond does not have to sell their home to raise the necessary entry costs. The home is also exempt from the age pension assets test – two years from the date a person moves into care. 3
Indeed, a home will remain exempt beyond the two year period if: a partner or dependent child lives in the house; a carer who is eligible for an Australian Government income support payment has been living there for at least two years or a close relative who is eligible for an Australian Government income support payment has been living there for at least five years.
The family home and the Age Pension
There are times when a person does need to sell their home to fund the sometimes large accommodation bond and this amount is also exempt from the age pension assets test. Any other proceeds from the sale of a home may impact how much age pension a person can receive.
While it has been possible to pay a higher bond to ensure any age pension is still paid, significant changes to aged care funding which take effect from 1 July 2014, means this strategy may not be possible.
Renting out the family home
An accommodation bond can also be paid in regular installments which may be funded through the principal residence being rented out. In this case the value of the home remains exempt from the age pension assets test, and the rental income is exempt from the age pension income test, while the periodic payments are being made. The rental income is not counted towards the calculation of income-tested daily care fees at an aged care facility.
The family home often plays a large role in financial planning because at most times it is your largest asset. For the moment at least, it remains sacred. If you are considering strategies that involve you or your loved ones contemplating aged care accommodation, don’t hesitate to seek advice from your financial adviser.