An aged care expert has told an inquiry keeping people out of aged care homes would reduce the prevalence of mental illnesses including dementia, and cut costs.

Keeping people out of aged care homes will save taxpayers in the long term as the facilities are rife with mental health problems, an inquiry has been told.

Geriatric psychiatrist Stephen Macfarlane says about half of all aged care residents suffer from depression.

A further 50 per cent will have dementia while 20 per cent of people are likely to also have an undiagnosed case of the illness.

The chief clinician for Dementia Australia was giving evidence on Wednesday at the Royal Commission into Aged Care Quality and Safety.

He recommended increasing the aged pension to ward off the risk factors for mental illness and other cognitive issues.

"Older people are subject to greater degrees of economic hardship, social isolation, loneliness, access to transport and public transport, all of which could be addressed by an improvement to the aged care pension."

About 20 per cent of dementia cases are preventable with simple lifestyle changes, he said.

"If you decrease the number of people who ultimately are going to require services for aged care and dementia-specific behaviour management, that eases the burden on services."

A witness told the Melbourne-based hearing dealing with her mother's mental health providers had been a traumatic experience.

Staff at the 83-year-olds high-care facility did not believe family members when they said her behavioural changes were down to depression.

"The staff assume just because mum is in her 80s and frail that she has dementia," Ms UX said.

Clinical geropsychologist Alison Argo told the inquiry staff in residential homes lacked the training to identify mental illnesses.

Insufficient funding meant only people with severe conditions were receiving public treatment.

"We have a saying, you know, unless they're actively suicidal, or actively psychotic, you've got no chance of getting your referral through," Dr Argo said.

She called for a long-term educational plan to increase the number of clinicians with experience in geriatric health and for multidisciplinary teams to be placed within facilities.

Mental health can't be addressed in isolation of physical and cognitive needs, she added.

Ms UX said she would like her mother's carers to provide activities which gave her a sense of purpose, not just entertainment to pass the time.

And more needed to be done to tackle the stigma among older Australians around mental illnesses, she said.

"There should be something for the older generation to tell them 'you've been strong all your life and soldiered on but it's OK to talk about mental health'."

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