The costs of living in a retirement village

Moving into a retirement village is very different from buying a house.

Instead of purchasing the property itself, you're usually purchasing the right to live there under an Occupation Right Agreement (ORA). Understanding how retirement village costs work is one of the most important parts of comparing your options.

While every retirement village has its own fee structure, most costs fall into three categories:

• Costs when you move in

This guide explains the most common retirement village costs and the questions you should ask before making a decision.

Costs when you move in

Entry payment (capital sum)

To move into a retirement village, you'll typically enter into an Occupation Right Agreement (ORA) and pay an entry payment, often referred to as a capital sum.

In New Zealand, the most common legal title under an ORA is a licence to occupy. This gives you the right to live in a specific home within the village, but you do not own the property or the land itself.

The amount you pay varies depending on the village, location and type of home.

Deposit

Some retirement villages require a deposit to secure your preferred home, particularly if there is a waitlist.

Deposits are often refundable if circumstances change before settlement, but it's important to confirm the village's policy before signing any documentation.

Legal costs

By law, you must receive independent legal advice before signing an Occupation Right Agreement.

Your lawyer will explain the contract, fees, rights and obligations associated with the village. While this is an additional upfront cost, it is an important part of protecting your interests.

Questions to ask before moving in

• What is the entry payment and what does it cover?
• Is a deposit required and is it refundable?
• What legal costs should I budget for?
• Are there any additional administration fees during the sign up stage?

Costs while living in a retirement village

Weekly or periodic fees

While living in a retirement village, you'll generally pay weekly or periodic fees.

These fees contribute towards the day-to-day operation of the village and cover your portion of the costs required to run and maintain the village, including:

• Rates
• Building insurance
• Grounds maintenance
• Maintenance of communal facilities
• Village management and administration
• Staff wages
• Security and village services

The amount charged varies between villages, so it is important to understand exactly what is included.

What isn't usually included?

Although every village is different, residents commonly pay separately for:

• Household power
• Phone and internet
• Contents insurance
• Healthcare services
• Housekeeping
• Meals and dining packages

Some of these costs may be included in serviced apartments or care settings.

Do weekly fees increase?

One of the biggest differences between villages is how weekly fees are treated over time.

Some villages offer fixed weekly fees that remain unchanged throughout your occupancy.

Others increase fees periodically, often based on:

• Inflation (CPI)
• Increases to New Zealand Superannuation
• Rising operating costs

Understanding how fees may change over time can have an impact on the long-term affordability of a village.

Questions to ask while comparing villages

• How much are the weekly fees?
• What is included and excluded?
• What is the village's policy for reviewing and increasing weekly fees?
• How have fees changed over the past five years?
• Will fees continue if I'm away on holiday or in hospital?

Costs when you leave

Leaving costs are often the most misunderstood part of retirement village living.

These costs can vary significantly between villages and can have a major impact on the amount repaid to you or your estate.

Deferred Management Fee (DMF)

In most situations, the Deferred Management Fee (DMF) will be the largest deduction from the amount repaid when you leave a retirement village.

The DMF contributes towards the long-term maintenance of both the village and the home you reside in. This includes the maintenance of communal facilities, buildings and roads, along with the refurbishment and preparation of homes before they are occupied by new residents.

Most retirement villages have a Deferred Management Fee of between 25% and 30%, which accrues over a set period. A common structure is a 30% DMF that accrues at 10% per year over three years. Once the maximum DMF has been reached, it does not increase further regardless of how long you remain in the village.

Example

You pay $1,000,000 for a villa.

The village has a Deferred Management Fee (DMF) of 30%, which accrues at 10% per year over three years.

• After one year, the accrued DMF would be 10% ($100,000).
• After two years, the accrued DMF would be 20% ($200,000).
• After three years, the DMF would reach its maximum of 30% ($300,000).

In this example, whether you leave after three years, ten years or fifteen years, the maximum DMF would remain $300,000.

Some villages include marketing, administration and legal costs within the DMF, while others charge these separately. For this reason, it's important to understand both the percentage charged and what is included within that fee when comparing villages.

Capital gains and capital losses

One of the biggest differences between retirement villages is how capital gains and capital losses are treated.

It's important to note that capital gain arrangements are still relatively uncommon across New Zealand retirement villages, with fewer than 10% of villages currently offering residents a share of any capital gain. However, because the financial outcomes can vary significantly between villages, it's important to understand how gains and losses are treated before signing an Occupation Right Agreement.

Full capital gain

Some villages allow residents to receive 100% of any capital gain when their home is relicensed.

Shared capital gain

Some villages share any capital gain between the resident and the operator according to a predetermined formula.

No capital gain

In some villages, the operator retains any increase in value when the home is relicensed.

Capital losses

It's equally important to understand what happens if the home is relicensed for less than the original entry payment.

While capital loss provisions are relatively uncommon in New Zealand retirement villages, it's still worth understanding how they work when comparing contracts.

As part of the proposed retirement village reforms, residents will only be liable for a capital loss if they are also entitled to share in a capital gain. Where a resident shares in a capital gain, any capital loss can only be allocated in the same proportion.

For example, if a resident is entitled to 50% of any capital gain, they could only be responsible for 50% of any capital loss. If a resident is not entitled to any capital gain, they would not be liable for a capital loss.

Weekly fees after you leave

Under the current law, your Occupation Right Agreement will set out whether weekly fees cease when you provide vacant possession of the unit or continue until the home is relicensed. If fees continue, operators must reduce them by at least 50% by the later of:

• The date you stop living in the unit and remove your possessions, or
• Six months after your Occupation Right Agreement terminates.

As part of the proposed retirement village reforms, this is expected to change. The announced reforms state that weekly fees must stop when a resident permanently vacates their home, meaning operators will no longer be able to continue charging weekly fees after a resident has moved out.

While these reforms have been announced, they are not yet in force. Until the changes take effect, it's important to understand what your Occupation Right Agreement says about ongoing weekly fees after you leave.

When do you receive your money back?

Under the current system, repayment often occurs once the operator has relicensed the home to a new resident. Because there is currently no statutory deadline for repayment, the time between vacating a home and receiving funds largely depends on how quickly that home is relicensed.

As part of the proposed retirement village reforms, operators will be required to repay the resident's (or estate's) net capital sum within 12 months of the home being vacated, even if the home has not yet been relicensed.

The reforms also introduce an interest requirement. If repayment has not been made within six months of the home being vacated, operators will be required to pay interest on the outstanding amount until it is repaid.

While these reforms have been announced, they are not yet in force. In the meantime, ask the village sales manager about typical repayment timeframes. You can also refer to the village's Disclosure Statement, which includes the average time taken to relicense homes over the previous 12-month period.

What if you move to another home within the village?

It's common for residents to move to a different home within the same village as their needs change. For example, moving from a villa to an apartment, serviced apartment or care suite.

The financial implications of transferring can vary considerably between villages. Depending on the village's transfer policy, you may be required to pay a transfer fee and your Deferred Management Fee may be reset, partially reset or continue from where it had already accrued.

Ask the sales manager whether a transfer fee applies and how your Deferred Management Fee will be treated if you move to another home or to higher level care in the village.

Questions to ask about exit costs

• What is the Deferred Management Fee percentage?
• Over how many years does the Deferred Management Fee accrue?
• Am I entitled to any capital gain?
• Could I be responsible for any capital loss?
• Do weekly fees continue after I leave the village?
• When will I receive repayment of my capital sum?
• What happens if I transfer to another home or higher level care within the village?
• Is a transfer fee payable if I move to another home within the village?
• Are there any additional marketing, legal or administration costs when I leave?

Summary

Moving into a retirement village is not simply a housing decision. It's a financial decision that can have long-term implications for both you and your family.

Understanding the costs of moving in, living in the village and eventually leaving will help you compare villages more confidently and choose an option that best suits your lifestyle, budget and future needs.