Aged care loans to pay accommodation bond: are they worth it?
Coming up with a bond for a parent to move into aged care often means selling the family home, unless you are lucky enough to have spare cash or investments.
Refundable accommodation bonds (RABs) are typically more than $500,000 and then there are daily accommodation fees on top.
La Trobe Financial is offering an aged care loan that uses the equity in the parent's home as security and lends up to 50% of the value of the property (maximum $750,000) to pay the bond. The loan can also be for repairs or paying off the mortgage.
The interest compounds and is added to the loan balance. Interest repayments are due when the total loan balance increases to 140% of the amount borrowed. For example, if you borrow $250,000, you will need to pay interest when the balance hits $350,000.
The loan is for the over-80s but younger people can be considered. The maximum term is seven years. The application fee is $2500, which can be paid from the loan. The interest rate is 5.99% for the first five years, rising by 2% in years six and seven.
A loan may affect an age pension. Your parent is exempt from the assets test for two years if they move into care and do not sell their home, says the Australian Securities and Investments Commission. If the house is rented, check how the rent is assessed under the aged care means test with the Department of Human Services.
Interest rates for aged care loans are generally higher than for average home loans and La Trobe's fees are on the high side compared with other similar products.
Understand how the costs are calculated and watch out for the compounding interest payments, as the debt can rise quickly as the interest builds up over the term of the loan.
Consider whether the loan is enough to cover the bond and the daily fees and consider the effect on the age pension. Compare taking out a bond with selling the home outright, which admittedly can be traumatic.