Retirement village exit fees explained

When people compare retirement villages, they usually start with the entry price. But the money you get back when you leave, and the fees deducted from it, can matter just as much. Exit fees are also the area where contracts differ most, which makes comparing villages difficult.

This guide explains the main exit costs, how a deferred management fee is calculated, and the questions to ask so you can compare contracts fairly. It uses simple examples to show how the mechanics work. The figures in examples are illustrations only, not typical or recommended terms. Always rely on the actual disclosure documents and contract, and get independent legal and financial advice.

What happens to your money when you leave

In most retirement village contracts, when you leave (or your estate does, after your death), the unit is resold or re-leased to a new resident. Out of the proceeds, or out of your original ingoing contribution, the operator deducts the exit costs set out in your contract. You or your estate receive what is left, called the exit entitlement.

The main exit costs can include:

1. The deferred management fee (DMF).
2. A share of capital gain, or sometimes a share of capital loss.
3. Refurbishment or reinstatement costs.
4. Selling or marketing costs.
5. Ongoing charges for a period after you leave.

How a deferred management fee works

A DMF is usually expressed as a percentage that accrues for each year (or part year) you live in the village, up to a maximum. The contract states:

• the rate, such as a fixed percentage per year, or different rates in the first years and later years;
• the cap, the maximum percentage after a certain number of years;
• the base, whether the percentage is applied to your entry price or the resale price when you leave;
• how part years are counted, for example daily or by whole years.

A simple illustration

Suppose a contract (for illustration only) charges 3% of the entry price for each year of residence, capped at 30%. On an entry price of $500,000:

If the same contract applied the percentage to the resale price instead, the fee would rise or fall with the unit's value at the time you leave.

You can test different rates, caps, bases and lengths of stay with our exit fee estimator.

Entry price or resale price?

Whether the DMF is calculated on the entry price or the resale price can make a big difference:

• On the entry price, you know the maximum fee in dollar terms from day one.
• On the resale price, the fee depends on future prices, which nobody can predict. If values rise, the fee rises too. If they fall, the fee falls.

Capital gain and loss

Some contracts let you keep all of any increase in the unit's value, some share it with the operator in set proportions, and some give the operator all of it. Some also share capital losses. For a loan and licence contract, there may be no capital gain to you at all: you receive your original contribution back, less fees.

Ask the operator to show, in writing, how capital gain or loss would be treated under your contract.

Refurbishment and reinstatement

When you leave, the unit may need work before a new resident moves in. Contracts distinguish between:

• reinstatement, returning the unit to its original condition allowing for fair wear and tear;
• renovation or refurbishment, upgrading the unit.

State laws limit what residents can be charged in some cases. Ask who pays for what, how costs are set, and whether you'll be consulted.

Ongoing charges after you leave

You may need to keep paying recurrent charges for a period after you leave, until the unit is resold or a set time passes. State laws limit this in different ways. Check what your contract and state law say.

How long until you're paid?

Exit entitlements may be paid when the unit is resold, or by a deadline set by state law, whichever comes first. Several states have introduced maximum timeframes and buyback rules for some contract types. This matters if you need the money to pay for aged care or another home. Check the rules in our laws by state guide.

Comparing contracts fairly

Because terms vary so much, compare villages by estimating what you'd get back over different lengths of stay, such as 3, 5, 10 and 15 years. For each scenario, work out:

1. the entry price and other entry costs;
2. total ongoing charges over the period;
3. the DMF and other exit costs;
4. your estimated exit entitlement.

Many operators offer multiple contract options. A lower entry price often comes with a higher DMF, and vice versa. The best option depends on how long you expect to stay and your other financial plans.

Common mistakes

• Comparing villages only by entry price.
• Not reading how part years are calculated.
• Assuming you'll share in capital growth.
• Not planning for the time it may take to receive your exit entitlement.

Key points

Exit costs, especially the deferred management fee, can be a large part of the total cost of retirement village living. Understand the rate, cap and base of the DMF, how capital gains and losses are shared, who pays for refurbishment, how long ongoing charges continue, and when your exit entitlement is paid. Compare contracts over several lengths of stay and get independent legal and financial advice.