Costs

There are usually significant costs when you enter and leave a village or transfer within it, as well as ongoing expenses while you live there. You need to know what the charges cover and exactly how much they will be.

The most common form of legal title with retirement villages is called a 'licence to occupy'. This section focuses on the costs involved with having a licence to occupy, including:

• Costs when you enter
• Costs while you're living at the village
• Costs when leaving the village

You're bound to have lots of questions about the costs of village living. Our financial checklist is there to help - it suggests questions to ask, and might prompt you to think of a few others.

Costs when you enter

As a new resident, you'll pay a capital sum when entering a village. In many cases, this gives you the right to live in your unit, but you're not buying the unit itself.

Typically, up to 30% of that capital sum is spent over the following three, four or five years to cover other costs, such as the use of communal facilities, management, or long-term maintenance.

This is usually deducted at the end and might be called 'capital sum deductions', 'depreciation', 'donations' or 'amenity' or 'facility' fees. The technical term for this is 'amortisation'.

Costs while you're living at the village

While you're living in the village, you'll pay regular fees on a weekly, fortnightly or monthly basis. These fees cover village costs such as rates, insurance and other operating costs, as well as services such as security, gardening and healthcare.

Some villages include a greater range of services in their fees or offer various care packages. Others leave it up to you to choose and pay for the services you want or need. Make sure you find out whether the village adds a premium for these services, or whether they just recover their costs.

In most cases, you'll have to pay for your own telephone and power, contents insurance and medical costs, in addition to your normal household and personal expenses. Serviced apartments are an exception - generally, serviced apartments include these costs in one package. This package can even cover things like food.

Make sure you find out the likely total costs of living in a retirement village, and when these costs are charged or deducted. The village manager must give you a disclosure statement listing these costs and when they are charged or deducted.

When considering the everyday costs, ask about:

• Increases in charges
• What if you can't afford the costs
• What if your personal situation changes

Increases in charges

Increases in costs are often a necessary part of village life. The good news is that residents must be consulted about any proposed changes to services, benefits or charges that might affect them. Ask the village manager about how they make changes to their fees, and find out about how and when they pass on their increased costs.

Some villages put their residents at ease by promising a flat or capped rate of increase to their regular fees. Others even commit to not increasing fees for a certain period, or might promise not to increase fees at all. Other villages might increase their fees in line with increases in New Zealand Superannuation or the Consumer Price Index (CPI).

Some increases such as to rates and power are outside the control of the village. Be aware that if these increases are not passed on to residents in some way, the village could become run-down.

 What happens if you can't afford the costs?

Deferred payments
Ask the village manager if they offer a way for regular payments or unexpected charges to be deferred. If so, you can pay the deferred amount to the village after you leave.
If deferred payments are an option, find out how they work and what rate of interest is charged. For example, the village may have an arrangement with the local authority to defer individual residents' rates payments until the resident leaves the village. Sometimes the village may even be prepared to do this itself. And don't forget to make sure that any agreements about deferred payments you make are in writing when you enter the village.

Mortgaging your unit
You might be able to borrow against the payment you have made to live in your unit, with a mortgage or a type of equity release. Reverse mortgage products are being developed specifically for retirement villages. Ask the village manager or your lawyer if this is an option.

Government assistance
Find out more about government assistance for services, health and accommodation costs. Whether you qualify for these may depend on whether you own your unit or simply have the right to live there (such as with a licence to occupy).

What if your personal situation changes?

Your needs will change in the future, and you should keep this in mind when you're working out the financial details. You might decide you want to transfer to a different unit within the village, or you may go from living with someone to living alone or vice versa. At some point, you may need a higher level of care in the village or outside the village.

Make sure you find out about the cost of transferring from a unit to a higher level of care within the village as these charges can add up and affect your future choices. For example, in some villages, you might have to pay entry and exit charges each time you move within the village while in others, you might only have to pay these charges when you enter or leave the actual village. The village manager must give you a disclosure statement that will include the costs of transferring.

Costs when leaving the village

There are often significant costs associated with leaving a village and selling the unit. You'll need to know about these costs in case you decide you want to live elsewhere, or you want to leave money in your will. Be aware that you may have significantly less money than when you entered the village, particularly if there are deductions from the price you originally paid for the unit and if you do not get any share in the capital gain.

Make sure you know about:

• The sale process
• The refurbishment required
• What happens if your unit is slow to sell
• How much you're likely to get from the sale

The sale process

In many villages, residents don't control the sale of their unit when they leave. They may have to pay for the cost of refurbishment and they often have to wait until their unit is sold before receiving their share of the proceeds.

The refurbishment required

You might have to meet the costs of refurbishing your unit. Check the standard it needs to be refurbished to when you leave: does it need to be in the same condition as when you first moved in, a 'reasonable' condition, or 'as new'? If 'as new' this usually includes repainting, re-carpeting, and replacing fixtures and fittings. It may include replacing appliances such as stoves and dishwashers, and can sometimes extend to completely refitting kitchens and bathrooms.

Village operators use different methods to calculate the cost of refurbishment. Some complete the refurbishment then charge the actual cost, others charge a fixed amount based on a percentage of the original purchase price or the new resident's purchase price.

Make sure you find out whether refurbishment is required, what it involves and how the costs for this are calculated and passed on.

What happens if your unit is slow to sell

Your unit might not sell as quickly as you expect, which will mean a delay before you (or your estate) receive your share of the proceeds. It's also likely that you'll have to continue paying regular village charges until your unit sells. From September 2007, retirement villages will have to comply with a Code of Practice that sets some limits around the charges and deductions that can be made if this happens.

How much you're likely to get from the sale

Find out if you would get any share in the capital gain when you leave and the unit is sold - in many cases, residents do not get any share of capital gain but have to pay for any capital loss made on resale. Often they only get back part of the price they paid when they entered the village.

Deductions from the price they paid often include:

• A deduction for the upgrade of communal facilities or long-term maintenance (this is often up to 30% of the original price paid, and is deducted over the first three, four or five years that the resident lives in the village)
• A deduction for refurbishment
• A deduction for marketing, selling, legal and administration costs associated with selling the unit

In some cases, residents don't have to pay refurbishment costs in return for not getting any share in the capital gain. In other cases, residents may get some or all of the capital gain but pay a separate amount for using the community facilities or long-term maintenance.

Find out the amount you are likely to get after two, five or 10 years of buying into the village. These figures will help you to understand the deductions that are made when the unit is sold. The village manager must give you a disclosure statement that includes these figures.

The purchase cost when entering a village is not the only significant cost. In addition, residents may not be entitled to any capital gain when they leave.