Elderly should downsize to pay for care

27 November 2012

As your age increases it may be a good time to downsize your home and start planning to save for care in later life.

Downsizing your larger home to something more suitable for your new needs ensures you don’t rely on having to sell the property to pay for cost of care. You could then rent your larger property and use the incoming money to finance your new living expenses.

The home you have lived in may now be too big for your needs and savings can be made in more than one area by downsizing. Domestic costs as well as electricity and rates will all decrease enabling you to free up more money.

Another alternative is to purchase a home in a retirement village under a life rights scheme. This purchase is usually on a cash basis as most banks are reluctant to provide a bond to anyone over the age of 60.

One thing to keep in mind if you choose this option is to have all documentation approved by an attorney as mistakes can prove costly otherwise.
How does life rights purchasing work?

A life rights scheme is a basic concept that an individual pays a sum of money in respect of a specific property in the scheme and in return they and their spouse receive the right to live in that unit for the remainder of their lives.

On the death of one spouse, the surviving spouse is entitled to continue living in the unit until their death or until they sell the unit. The sum of money that is paid is a market-related and pre-determined amount which is often viewed as a lifetime of rental paid in advance.

The payment of the sum will be set out in the sale agreement between the parties and will usually take the form of a deposit with the outstanding amount being paid within a few months of signing the agreement.

The upside is that there are no transfer duty payable or registration fees. However, it’s critical to realise that the property itself does not become an asset in the purchaser’s estate and therefore cannot be bequeathed to an heir in their will.

Upon resale of the unit, the outgoing resident (or their deceased estate) receives a percentage of the market-related resale price. The exact percentage will differ between each development but will be in relation to the number of years the resident occupied the unit.

Therefore, the more years spent in the unit, the lesser the amount transferred to the outgoing resident.

The amount retained by the development is usually used to subsidise the number of facilities provided by a retirement village. This hence stabilises the monthly levy and removes the risk of inflation and drastic increases in levy which could be of great concern to a retired person with a limited income.

However, a key consideration is that banks are not keen to grant finance on a life rights property because of lack of security. However, the fact remains that financial institutions will still take an individual’s age into consideration, even with sectional title loans, as there is a greater risk on the banks when granting credit.

Some banks provide senior citizens with a covering bond in which they put up their existing property as security for the loan.

For further information on financial matters please contact DebtBusters on 0869 99 06 06 or visit our website www.debtbusters.co.za.

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