Reverse Mortgage vs. Super: Which is Best for paying Aged Care costs?

By Darren Moffatt

November 1, 2024

0 comments


When it;s time to enter aged care, one of the biggest decisions many Australian seniors face is how to pay the Refundable Accommodation Deposit (RAD). It’s a lump sum that can be quite daunting, often ranging from $200,000 to over $500,000. 

You might be wondering whether you should dip into your superannuation (Super) or consider other options, like a Reverse Mortgage. Both options have their benefits, but it’s essential to know how each works and how they can impact your future.

Here, we’ll break down how a Reverse Mortgage could be a more flexible way to pay for your RAD compared to using your Super.

What is a Refundable Accommodation Deposit (RAD) and Daily Accommodation Payment (DAP)?

When entering an aged care facility in Australia, one of the first financial decisions you’ll face is how to pay for your accommodation. Most facilities require either a Refundable Accommodation Deposit (RAD) or a Daily Accommodation Payment (DAP), but what are they, and how do they differ?

Refundable Accommodation Deposit (RAD)

The RAD is a one-time lump sum payment made to secure accommodation in an aged care facility. As the name suggests, the RAD is fully refundable when you leave the facility or pass away, provided all care fees have been settled. However, coming up with the initial deposit can be a challenge, as the amount often ranges between $200,000 and $550,000, depending on the facility and location.

So, how do you come up with this large sum of money without compromising your financial security? Many seniors consider options like selling assets, using superannuation, or even exploring a Reverse Mortgage, which allows them to access their home’s equity without selling it outright.

Daily Accommodation Payment (DAP)

For those who may not have the funds to pay a large lump sum, the Daily Accommodation Payment (DAP) offers an alternative. Instead of paying a one-off deposit, the DAP is a rental-style payment made daily to cover your accommodation costs. The amount of the DAP is calculated based on the RAD, using a government-set interest rate. The DAP is not refundable since it’s treated as a fee for the service of staying in the facility, rather than a deposit.

The key advantage of the DAP is that it provides flexibility. You don’t need to come up with a large sum upfront, and you can opt to pay periodically. However, over time, paying the DAP can become more expensive than paying a RAD if you stay in the facility long term.

What’s the Difference Between RAD and DAP?

  • RAD: This is a lump-sum deposit that is fully refundable, typically preferred by those who have the means to pay upfront and want to avoid ongoing payments.
  • DAP: This is an ongoing daily payment, calculated as a percentage of the RAD, for those who prefer to avoid a large upfront deposit. It’s a non-refundable payment that continues for as long as you stay in the facility.

It’s important to note that many aged care facilities offer a combination option where you can pay part of the RAD upfront and cover the rest with daily DAP payments, providing flexibility based on your financial situation.

[ Related Post: Aged care finance: What is the Best Way to Fund Your Aged Care Costs? ]

Option 1: Using Your Superannuation to Pay for Aged Care

Superannuation is often the go-to for large expenses in retirement. If you’ve saved a solid amount over the years, it can seem like a convenient solution to pay off the RAD in one go. Here’s what you should consider:

Pros of Using Super:

  • No Interest or Debt: Since you’re using your own money, there’s no interest to pay or loans to worry about.
  • Simple and Quick: It’s an easy way to pay the RAD upfront and avoid any further financial complications.
  • Debt-Free Future: Once you’ve paid, you don’t owe anything further on the RAD.

Cons of Using Super:

  • Reduces Your Savings: Taking a large amount from your Super means less money for day-to-day living expenses, future healthcare needs, or even travel plans you might have. It could stretch your finances thin in the long run.
  • Misses Out on Growth: Money in Super is typically invested, and by withdrawing a big chunk, you miss out on potential growth and returns.
  • Tax Considerations: While most withdrawals from Super are tax-free after age 60, it’s always a good idea to check whether pulling out a large amount affects your overall tax situation.

Option 2: Using a Reverse Mortgage to Pay the RAD or DAP

A Reverse Mortgage allows you to tap into your home’s value without needing to sell or move out. This could be a great way to come up with the funds for your RAD while keeping your Super intact. Here’s how it works:

Pros of a Reverse Mortgage:

  • Preserves Your Super: With a Reverse Mortgage, you don’t need to dip into your Super. This means you still have those retirement savings to cover your living expenses, healthcare, or any other needs down the road.
  • No Monthly Repayments: You don’t need to worry about making repayments right away. The loan is repaid when the home is sold, which typically happens when you move into permanent care or pass away.
  • Flexibility: You can choose to receive a lump sum to cover the RAD or set up payments over time—whatever works best for your situation.
  • You Stay in Your Home: Even with a Reverse Mortgage, you retain ownership of your home. If your spouse is still living there, they won’t need to move out, providing stability for both of you.

Cons of a Reverse Mortgage:

  • Interest Adds Up: Since you’re not making monthly repayments, the interest on a Reverse Mortgage compounds over time, reducing the equity left in your home.
  • Impact on Inheritance: Because the loan is repaid from the sale of your home, it can affect how much is left to pass on to your heirs.
  • Home Equity Limitations: The amount you can borrow depends on your home’s value, so if your home is worth less or you have limited equity, a Reverse Mortgage might not cover the full RAD amount.

[ Related Post: Home Care Funding: How Reverse Mortgage Helps you stay at home, longer ]

Deciding Between Super and a Reverse Mortgage to Pay forAged Care: Three Scenarios

When it comes to paying for aged care, the right approach often depends on your financial situation, particularly the balance in your superannuation. Deciding whether to use your Super, tap into your home’s equity with a reverse mortgage, or even a combination of both can feel overwhelming. Let’s break it down into three common scenarios based on the size of your Super balance.

1. High Super Balance: RAD Payment Is Typically Straightforward

If you have a high Super balance, paying the RAD using your Super can often be the simplest solution. With sufficient funds in Super, you can make the payment without worrying about ongoing debt or repayments. This approach allows you to cover the RAD in one lump sum, and since Super is generally tax-free for those over 60, it’s a smooth transaction.

However, even with a high Super balance, it’s important to consider how much you’ll have left for ongoing living expenses, healthcare, or other retirement needs. In this case, consulting a financial advisor can ensure you’re making the best decision for your long-term financial health.

2. Low Super Balance: Borrowing or Selling Might Be Necessary

For those with a low Super balance, the decision is often more straightforward. In many cases, Super alone won’t be enough to cover the RAD, meaning alternative options like taking out a reverse mortgage or selling your home might be necessary. If selling isn’t an option, a reverse mortgage allows you to tap into the value of your home, freeing up funds to pay the RAD while still staying in your home.

A reverse mortgage can provide the flexibility to cover the cost of accommodation without depleting your Super, but it’s essential to understand how it will impact your finances in the long term.

3. Medium Super Balance: The “In-Between” Scenario

When you have a medium Super balance, things can get a little murkier. You may have enough Super to cover part of the RAD, but not so much that it won’t significantly impact your retirement income. In this scenario, there’s no one-size-fits-all solution, and financial advice is strongly recommended.

You could choose to pay part of the RAD upfront with your Super and finance the rest through a reverse mortgage or DAP. This approach allows you to maintain a safety net of Super for other retirement needs, while still covering the accommodation cost. However, it’s crucial to get professional advice on what balance works best for your situation.

Want to learn more about Reverse Mortgage? Find out more about how to use a Reverse Mortgage for debt consolidation or download your FREE REVERSE MORTGAGE GUIDE

Ready to Apply? You can now check your eligibility online or call Seniors First on 1300 745 745. 

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Please consult a licensed financial advisor before you make any decision.

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