One of the most fundamental decisions for anyone contemplating a move into residential aged care is understanding the room cost and how they will fund it. And this became more complicated and expensive from 1 November 2025.
Higher room prices
The first impact was the rise in room prices throughout 2025, with average increases of around 12% (approximately $60,000) over the year. This was driven in part by the increase in the approval cap from 1 January 2025, as well as rising costs associated with aged care property.
On top of this, were other changes:
- Increases to the maximum permissible interest rates (MPIR), used to calculate the rental option (daily accommodation payment - DAP)
- The reintroduction of retention deductions on refundable accommodation deposits (RADs), and
- Inflation-based indexation of daily accommodation payments (DAPs).
For clients, these changes mean the cost of entering care has increased regardless of their payment choice. Clients opting to pay a RAD face higher upfront capital requirements, while those paying a DAP must manage higher and increasing cash flow requirements.
These pressures reinforce the need for careful modelling showing projections over time. Choosing between a RAD and a DAP has always been a strategic decision, but the gap between the two is narrower and more sensitive to assumptions around inflation, investment returns, and length of stay in care.
Retention deductions and DAP indexation
A significant change for new entrants from 1 November 2025 is the reintroduction of retention deductions on any RAD paid (or RAC for low-means residents).
Under the new rules, providers must retain up to 10% of the RAD over a five-year period (at 2% per annum). This effectively repositions the RAD in part as a consumable asset rather than a fully refundable one.
From a planning perspective, this has implications for estate outcomes and alters the comparative analysis between RAD and DAP. The comparison is no longer framed solely around opportunity cost, ie. what return could be earned if funds were invested instead of paid as a RAD. Now, there is an additional cost associated with the RAD itself, which needs to be factored into advice.
At the same time, clients choosing to pay via a DAP face greater uncertainty. DAPs for new residents are indexed every six months, introducing an escalating cashflow risk that did not previously exist. Long-term affordability must be assessed more carefully.
The well-established “DAP from RAD” strategy continues to be available to assist with cashflow management. This strategy involves paying a part RAD while drawing from this pool to meet ongoing DAP costs. Advisers will need to revisit assumptions underpinning this strategy, particularly in light of retention deductions and indexed DAPs.
Protection for existing residents
Residents who entered care before 1 November 2025 are generally protected under the old rules and are not subject to retention deductions or DAP indexation.
However, this grandfathering is not absolute. If a person wants to move to a new provider, they may be required to opt into the new fee structure as a condition of acceptance. This creates a potential trap, where a seemingly straightforward decision to relocate (driven by care needs or proximity to family) can result in unintended financial consequences.
Making the choice of RAD or DAP
A positive change under the new rules is the removal of the 28-day notification requirement. Clients are no longer required to decide within the first 28 days whether they will pay via RAD or DAP. Now, they only need to confirm their intention to pay a RAD when ready to do so.
This provides valuable breathing room. It reinforces that the decision belongs to the client, not the aged care provider, and in the client’s own timeframe.
In practice, this means strategies can be more effectively timed. For example, a client may initially pay for their room via a DAP, while arrangements are made to sell the family home or restructure investments. Once funds become available, they can then elect to pay a RAD without any prior commitment to the provider.
Finally, there is a practical but critical issue that advisers must manage carefully. A late legislative change in September 2025 means clients must have their means-tested assessment (MTA) completed by Services Australia before they can pay a RAD. This introduces a risk that administrative delays may extend the period during which DAPs are payable.
The key takeaway is simple but critical - do not delay the paperwork. Early initiation of the means assessment process should form part of the advice strategy.
Final thoughts and actions
Taken as a whole, the changes from 1 November 2025 reinforce the growing complexity of aged care advice. Accommodation decisions are not static or one-dimensional, but require a careful balancing of capital, income, timing, and regulatory considerations.
For financial planners, this underscores the value of proactive and well-timed advice which is delivered with a clear understanding of both the rules and the practical realities clients face when accessing aged care.
For further information refer to www.agedcaresteps.com.au
This article has been provided by Louise Biti, a director and co-founder of Aged Care Steps.
Disclaimer: This article has been prepared by Aged Care Steps Pty Limited, ABN 42 156 656 843 AFSL 486723, based on our understanding of the relevant legislation at the time of writing. While every care has been taken, Aged Care Steps Pty Limited makes no representations as to the accuracy or completeness of the contents. The information is of a general nature only and is intended for use by financial advisers and other licensed professionals only; it does not take into account individual situations for clients. © Aged Care Steps Pty Limited, 2025.
