Sell, rent, or borrow against it? Funding an aged-care RAD when your money is in the family home

When an older person moves permanently into residential aged care, they usually face a substantial accommodation cost. It can be paid as a lump-sum Refundable Accommodation Deposit (RAD) — a deposit, set by the facility, that can run from a few hundred thousand dollars to $700,000 or more — or as an equivalent Daily Accommodation Payment (DAP), which is interest charged on the unpaid RAD, or as a combination of the two. Many incoming residents don't have that kind of cash sitting in the bank. Their largest asset is the family home, which leaves the family with a high-stakes question: do you sell the home outright to pay the RAD, keep the home and pay the DAP (often funded by renting it out), or keep the home and borrow against it — through a reverse mortgage or the government's Home Equity Access Scheme — to raise a lump sum for the RAD while still owning the house?

Each path lands differently on the Age Pension, on the aged-care means-tested fee, on ongoing tax, on the eventual value of the estate, and on the family's flexibility. Two rules shape the maths above all others: the two-year exemption of the former home from the aged-care means test while a "protected person" still lives there, and the cap on the home's assessable value — $214,884 as at 20 March 2026 (My Aged Care, https://www.myagedcare.gov.au/means-assessments-residential-aged-care) — that applies after that. The reflexive assumption that "we have to sell the house" is wrong about as often as it's right, and rushed sales in the first weeks of care entry are among the most commonly regretted financial decisions families make. This is general information only, not personal advice; aged care is genuinely specialist territory.

What changed under the new rules from 1 November 2025?

Before the detail, one major caveat. A new Aged Care Act took effect on 1 November 2025, reshaping how people contribute to their care. The figures in this article — the means-tested care fee caps, the basic daily fee — reflect the arrangements that apply to people already in care under grandfathering ("no worse off" protections), and the broad RAD-versus-DAP accommodation framework continues. But one change matters directly to home-equity funding: for anyone who first enters residential care on or after 1 November 2025 and pays by refundable deposit, the provider now deducts a retention amount of 2% a year of the RAD balance, for up to five years, and that retained money is not refunded on exit (Department of Health, Disability and Ageing, https://www.health.gov.au/our-work/residential-aged-care/charging/rad-and-rac-retention). On a $400,000 RAD held five years, that's roughly $40,000 kept by the provider rather than returned to the estate. So the once-universal "the RAD comes back in full" is now true only for pre-1 November 2025 entrants. Because the rules differ by entry date and are still bedding in, anyone entering care now should confirm the current figures with My Aged Care or an aged-care-accredited adviser.

What's a quick refresher on the cost structure?

The RAD is a lump sum paid to the provider and treated essentially as an interest-free loan to them, historically refundable in full on the resident's death or transfer (now subject to the retention amount above for new entrants). The DAP is the equivalent daily payment charged instead of, or alongside, a RAD, calculated as the agreed room price multiplied by the Maximum Permissible Interest Rate (MPIR) and divided by 365 (My Aged Care, https://www.myagedcare.gov.au/understanding-aged-care-home-accommodation-costs). The MPIR is set quarterly; it is 8.43% from 1 July 2026 (Department of Health, Disability and Ageing, https://www.health.gov.au/resources/publications/base-interest-rate-bir-and-maximum-permissible-interest-rate-mpir-for-residential-aged-care), so a $400,000 RAD-equivalent translates to about $33,720 a year, or roughly $92 a day, in DAP. On top of accommodation, every resident pays the basic daily fee, set at 85% of the single basic Age Pension rate — $66.80 a day as at 20 March 2026 (My Aged Care, https://www.myagedcare.gov.au/understanding-aged-care-home-accommodation-costs). Residents assessed as having the means also pay a means-tested care fee, subject to an annual cap of $35,910.43 and a lifetime cap of $86,185.23 as at 20 March 2026 (Department of Health, Disability and Ageing, https://www.health.gov.au/our-work/residential-aged-care/charging/means-assessment). The choice between RAD and DAP is a topic in its own right; here the focus is how to fund the RAD when most of the resident's wealth is in the family home.

Why is the protected-person two-year exemption the single most important rule to check?

If a protected person continues to live in the home after the resident enters care, the home is fully exempt from the aged-care means test for two years, after which it becomes assessable but capped at $214,884 (My Aged Care, https://www.myagedcare.gov.au/means-assessments-residential-aged-care). A protected person is typically the resident's partner or dependent child, a carer eligible for an income support payment who has lived in the home for at least two years, or a close relative eligible for income support who has lived there for at least five years. For a couple where the spouse stays in the home, this rule changes everything: selling the home in the first two years can be much worse than keeping it, because a sale converts exempt value into fully assessable cash for both the aged-care means test and the Age Pension. For a single resident with no protected person at home, the home enters the means test from day one — but only at the capped $214,884, not its full market value, so the fear that "the home counts in full if we keep it" is also wrong. Knowing exactly which rule applies is the foundation for everything that follows.

What is Path A — sell the home and pay the RAD in full?

The simplest path is to sell the home, use the proceeds to pay the full RAD, and leave the residual cash as assessable savings. The consequence is that the home — previously exempt from the Age Pension assets test as the principal residence — becomes fully assessable cash, which for an asset-tested pensioner can cut the Age Pension substantially, while the cash above the RAD is also assessable for the aged-care means-tested fee. The 24-month Centrelink exemption that protects home-sale proceeds intended for a replacement home generally doesn't help, because a resident entering permanent care usually has no replacement-home intention. This path makes sense for a single resident with no protected person, where the family wants the home converted to cash for the estate, the resident isn't leaning meaningfully on the Age Pension, or there's simply no realistic way to keep the home. It works poorly where a protected person remains at home (selling wipes out the two-year exemption), where the resident is asset-tested for the Age Pension (a sale brings a real pension hit), or where the family wants to keep the home.

What is Path B — keep the home and pay the DAP?

Here the family retains the home and funds the DAP from the resident's income — Age Pension, super pension, any rent from the home, and savings drawdown. The home stays exempt (with a protected person) or capped (without one) for the aged-care means test, and fully exempt for the Age Pension assets test. If the home is rented out, the rental income is assessable for both the Age Pension income test and the aged-care means test, though rental expenses are deductible, and the net rent typically makes a meaningful contribution to the DAP. The home generally keeps its CGT main residence exemption for up to six years of absence while rented, provided no other property is claimed as the main residence in that time. This path suits a home in a strong rental market, a family that wants to keep the house, a resident with reasonable cash flow to cover any DAP shortfall, a preserved protected-person exemption, and an asset-tested pensioner. It fits poorly where the home isn't rentable (poor location or expensive repairs needed), where income beyond the Age Pension is too thin to fund the DAP, or where the family doesn't want the complications of becoming landlords.

What is Path C — keep the home and fund the RAD by borrowing against it?

The third path draws a lump sum against the home using a reverse mortgage or the Home Equity Access Scheme (HEAS) and uses it to pay the RAD. The home stays in the resident's name (and can be rented for extra income), and the loan compounds with no repayments required during the stay. Once the RAD is paid, it is not counted as the resident's asset for the means test, and on death or exit it is refunded (subject, for new entrants, to the retention amount), with the estate then repaying the loan. The home stays exempt or capped, protecting the Age Pension and aged-care position, and no DAP is payable because the RAD has been met. The catch is compounding: at the current 8.43% MPIR-style rate, a $400,000 reverse mortgage grows to roughly $600,000 over five years and about $899,000 over ten. HEAS lump sums alone are usually too small to cover a full RAD, so a commercial reverse mortgage — at a higher rate — is generally needed for larger amounts. This path makes sense where the family strongly wants to keep the home for sentimental, intergenerational, or estate reasons, where the expected stay is short (limiting the compounding cost), or where the other paths would create large pension or means-test problems and the family accepts the estate-erosion trade-off. It fits poorly for a long expected stay (ten years or more, where compounding bites hard), where HEAS alone won't cover the RAD and the family balks at commercial rates, or where a simpler path would serve.

Are combination strategies common and often the best fit?

Many residents pay part RAD and part DAP — perhaps half the maximum RAD upfront with the balance as DAP — which trims both the upfront cash needed and the ongoing interest. Where a spouse stays home initially but may move later, a staged approach of keep-and-DAP first, then sell at or after the two-year mark to reduce the DAP, often works well. Where rent can cover part of the cost, a smaller borrowed RAD topped up by a rental-funded DAP keeps the home while spreading the funding. The combinations are flexible, and the right blend depends on the specific facts.

What does the funding decision look like in practice?

These two cases show the funding decision in practice. They are illustrative only, not personal advice; aged-care funding is specialist territory and should engage an accredited aged-care adviser.

Domhnall and Ailsa, both 80, illustrate the couple case. Domhnall has just entered permanent care after a stroke, while Ailsa is staying in the family home (worth $1.1 million) for the foreseeable future; the facility's RAD is $480,000, they have $200,000 in combined super and savings, and they receive the full couple's Age Pension. On these facts the protected-person two-year exemption applies — Ailsa is a protected person living in the home — so the home is fully exempt from the aged-care means test for two years and capped at $214,884 after that. Selling would be a serious mistake: it would turn exempt value into about $1.1 million of assessable cash, cutting their pension sharply, and leave Ailsa needing somewhere else to live. The clean structure is Path B, keeping the home and paying the DAP: pay little or no RAD upfront and fund the $480,000-equivalent DAP — about $40,460 a year, or $111 a day, at the 8.43% rate — from income. Their pension transitions to the illness-separated single rates (each member receiving the higher single rate rather than the couple-each rate), lifting their combined pension. With the basic daily fee of $66.80 a day, the DAP, and Domhnall's care costs, there's still a cash-flow gap, partly met by drawing down the $200,000 over time and partly by Ailsa renting out a room within Centrelink limits, or by a careful downsizing in a few years that preserves the protected-person treatment. At the two-year mark the position is reviewed: if Ailsa is well and wants to stay, Path B continues with the capped home assessment; if she's nearing care herself, a coordinated transition is planned. On these facts patience is the strategy — don't sell in panic in the first weeks, model the cash flow honestly, and use the two-year window as the planning runway.

Wilbur, 84, widowed with no children, illustrates the single-resident case. He has recently entered permanent care after years of decline; his home (worth $750,000) sits empty, he has $280,000 in super and savings, the facility's RAD is $400,000, and he's on a part, asset-tested Age Pension. The protected-person exemption doesn't apply, since no one is left at home, so the home enters the aged-care means test from day one — but capped at $214,884, not its $750,000 value, so keeping it doesn't fully expose it. Three paths are worth modelling. Selling grosses about $720,000 after costs; paying the $400,000 RAD leaves roughly $320,000 of assessable cash, which (fully assessed and deemed) cuts the Age Pension and lifts the means-tested fee, with the estate ending up as the RAD refund plus the cash less care drawdowns. Renting and paying the DAP keeps the home — say $25,000 a year net rent on a well-located property — pays the $400,000-equivalent DAP of about $33,720 a year, keeps the home capped at $214,884 for the means test, and largely preserves the pension; the rent plus pension plus a modest super drawdown covers the DAP, basic daily fee, and care fee with a margin, and the estate keeps the (appreciating) home plus the super remainder. Borrowing instead means a $400,000 reverse mortgage at 8.43%, which pays the RAD and avoids the DAP but compounds to roughly $600,000 over five years; if the home is later sold for $750,000-plus and the RAD refunded — now around $360,000 for a post-November-2025 entrant after the retention amount — the net from the home transaction is in the order of $750,000 plus $360,000 less $600,000, about $510,000. On these facts Path B, keeping the home, renting it, and paying the DAP, is usually the cleanest — it preserves the home, funds care from rent, keeps the pension largely intact, and avoids both the compounding interest and the new RAD retention. The work is to confirm with an aged-care-accredited specialist, set up the rental management, plan the cash flow, and review annually.

For older Australians and their families entering residential care without liquid cash for the RAD, the right answer is rarely the default of selling, and almost never made well under emotional or time pressure. The work is to check the protected-person status first (the single most consequential rule), model all three paths over the expected care duration, weigh the aged-care means-tested fee and Age Pension impact under each, treat rental income as a serious DAP-funding source for a kept home, reach for combination strategies where the clean single paths don't quite fit, and — above all — engage an aged-care-accredited specialist and defer rushed decisions in the first weeks. The figures move with policy (the MPIR changes quarterly, and the 1 November 2025 reforms are still settling), so confirm the current rates, RAD rules, retention amounts, and exemption thresholds with My Aged Care, the Department of Health, Disability and Ageing, and Services Australia before relying on them. The shape of the decision is durable: keep the home where the means-test rules favour it, sell only where the alternatives don't fit, and borrow against it only where the family genuinely values keeping the home enough to accept the compounding cost.

Sources

• My Aged Care — Understanding aged care home accommodation costs
• Department of Health, Disability and Ageing — Means assessment for residential aged care
• My Aged Care — Means assessments for residential aged care
• Department of Health, Disability and Ageing — RAD and RAC retention
• Department of Health, Disability and Ageing — Base interest rate and maximum permissible interest rate (MPIR)