It’s best to break it down into the ingoing,the ongoing and the outgoing to make sure you look at the whole transaction. Here are five steps to take to help you work it all out.
Anyone looking at downsizing into a retirement village will know how complicated the financial arrangements can be.Louise Kennerley
Step 1 – Start with the Deferred Management Fee (DMF):The Deferred Management Fee (DMF) is typically the largest component in the outgoing box,although some villages will allow you to pay no management fee (with a higher purchase price). The industry norm is around 30 per cent,but it can be anything from zero to 100 per cent,and it typically accumulates over the first 5 or 6 years you live in the village.
So,the first step is to find out how much the DMF is and what it is based on – is it the purchase price or the future sale price?
If it is based on your purchase price,then you know how much it will be simply by multiplying the price by the percentage. For example,if the DMF is 5 per cent per year for six years then if you live in the village for 10 years your DMF will be 30 per cent. If your purchase price is $400,000 this means your DMF will be $120,000.
If it is based on the sale price,then you will need to guesstimate the price when you leave. My tip here is to be conservative. Using a 2 per cent,per year growth rate would mean a $400,000 unit would have a sale price of $487,600 in 10 years’ time. If your DMF is 30 per cent of the sale price it would be $146,279.
Step 2 – Add or subtract any share of capital gain or loss:Your contract may include receiving some (or all) of the capital gain or loss.
Many people think that “property always goes up,” but property prices fluctuate,particularly over short periods. Any capital gain assumption should consider any associated costs and your potential share in capital loss.
Step 3 – Add renovation costs:If you receive some (or all) of the capital gain then you may need to meet costs associated with achieving that gain,which often means renovations. If you have lived in the village for 10 years then the renovations could include a new kitchen,bathrooms and floor coverings which can add up.
Your contract may say that you do not need to renovate but reinstate your home which often involves some minor work like repairing any damage and removing any alterations you have made.
Step 4 – Add any selling costs:To find a buyer your home may need to be advertised,which can mean professional photography and furniture styling too,which all costs money. Like other property transactions,there can be legal fees,administration fees and sales commissions.
Step 5 - Look at the buyback period:The buyback period is not a cost,rather it could save you money (and stress) if your home does not sell. State-based legislation sets out the conditions and timeframes for buybacks which vary from no buyback through to a buyback after 18 months. There are villages that offer a buyback in a shorter period,it can be as short as 3 months where no buyback is required. If your next move is to aged care getting your money back sooner could save you thousands.
There is a lot to think about when you are moving to a retirement village,for most people what happens after they leave is furthest from their mind. Crunching the numbers on the village costs and making sure that you understand the impact on your age pension and rent assistance payments,how much money you will have to invest or spend and Home Care Package fees means that you know exactly where you stand before you sign on the dotted line.
Rachel Lane is co-author of and Downsizing Made Simple. She is also the creator of,a software programme designed to take the financial confusion out of downsizing.
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