You might have heard that people lose a lot of money when they move into a Retirement Village, or that entering a village is a ‘rip off’. We have found that people that make those kinds of statements usually do not understand how the unique financial agreements work when entering (and leaving) a village.
There is no denying that by signing up to a Retirement Village you are agreeing (usually) to losing a certain amount of your initial investment. However, it is not just being sacrificed for nothing. The amount that is retained by the village operator is called a Deferred Management Fee (DMF): as the name suggests, this is a payment made after you leave a village in recognition of the many services and amenities that you have been able to access during your time in the village.
DMFs vary greatly and it’s important you understand how your DMF will work. Usually, the DMF is a certain percentage each year and has a capped limit. For example, the DMF might be 5% (of the initial investment) per year, up to a maximum of 25%. So, in year 2 it’s 10%, in year 3 it’s 15% and at year 5 you reach the cap of 25%. Every year that you live in the village after this 5-year timeframe does not impact the percentage returned to you from your initial investment; that is, you will still receive 75% of your initial investment back when you leave the village (how and when this payment is made will also vary and will be covered in your Occupational Rights Agreement (ORA). It is for this reason that many people suggest it is best to enter a village early as you can maximise the amenities and services offered.
Another aspect people may be considering about the potential financial downsides of village living is the fact that most villages do not offer you (or your estate) any capital gain. What this means is that your DMF payment will be based on the price you paid when you entered the village. It is not related to the price at which the operator may re-sell your unit. For many New Zealander’s, capital gain on property has been how they may have grown their personal wealth/retirement savings. The last decades of property sales have been unusual, in that there has been very little downturn in the market, which usually results in capital loss. The contract you sign when you enter a village whilst not offering a share in capital gain, will also protect you against capital loss (if this were to occur).
What is most important to consider with both the DMF process and the potential to not capitalise on any property value increase is that purchasing into a Retirement Village is not a ‘regular’ property purchase. For this reason, the legislation governing Retirement Villages ensures you have independent legal advice to explain how the process works.
For many who make the choice to move into a village, this is the ‘rainy day’ they have been saving for and using a portion of their retirement funds to pay for the village lifestyle is worth it. This can require a mind shift – you are no longer building for a secure future but experiencing it.
Purchasing into a village is not a last step on the property ladder; rather, it is a way of using some of the funds which may have been invested in property to invest in a lifestyle choice.
Whilst it is not for everyone, many village residents will tell you they understand and are happy with the financial arrangements they have agreed to, and they certainly don’t see it as a ‘rip off’.
Updated: 4 Oct 2022