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Cuts to key government interest rates make aged care more affordable
Many people can’t afford aged care without some form of borrowing. However, there’s good news for these retirees as a drop in two key government-set interest rates arrived in the new year.
The Pension Loans Scheme (PLS) interest rate dropped significantly, from 5.25 per cent a year to 4.5 per cent a year, while the Maximum Permissible Interest Rate (MPIR), which applies in residential aged care, was cut to a new low of 4.91 per cent a year. The PLS is like a reverse mortgage, except you can’t take it as a lump sum.
It enables you to top up your income with a fortnightly payment – backed by a loan from the government secured by your home – of up to $1400 for singles and each member of a couple separated by illness, and $2110 for a couple.
PLS is an option if you own eligible property. Conditions include that you have ownership over the property and your name is on the title, so a granny flat, retirement village or land-lease community property arrangement is unlikely to qualify.
PLS interest compounds fortnightly, which means every two weeks you pay interest on the balance of your loan, including interest on the payments you have previously received.
Compound interest is great for investors but terrible for PLS borrowers, as the debt quickly builds over time.
People who are already receiving payments under the PLS automatically began to benefit from the reduced interest rate from January 1.
The MPIR applies to people funding their own accommodation in residential aged care.
Essentially, whatever you don’t pay as a lump sum (known as a Refundable Accommodation Deposit, or RAD), you pay as a daily charge (DAP), which is calculated using the MPIR.
For example, if the RAD is $500,000 and you pay $200,000, you will pay interest on the outstanding $300,000 at 4.91 per cent, or $40.36 a day.
To ease cash-flow pressure, many residents deduct their DAP from their RAD so, each month, their RAD reduces and DAP increases.
In aged care, the MPIR is set on entry and only changes if you move to another room or facility, so the new, lower MPIR will only apply to those people who either enter aged care after January 1 or moved after that date.
If you need to borrow to fund aged care, look beyond the interest rate, remembering that there is always more to the cost of borrowing than just the rate.
This article was originally published on The Sydney Morning Herald on 23/1/2020 by Rachel Lane.