What is a cash reserve in a reverse mortgage?

A reverse mortgage is a powerful financial tool for retirees looking to unlock the wealth in their home without selling. But what if you don’t need all the funds right away? That’s where a cash reserve comes in.

A cash reserve allows you to set aside a portion of your approved reverse mortgage loan for future use—giving you flexibility, financial security, and control over your retirement finances.

In this article, we’ll break down how a cash reserve works, its benefits, and what to consider when using this feature in a reverse mortgage.

What is a cash reserve?

A cash reserve is an optional feature within a reverse mortgage that allows borrowers to hold back part of their approved loan for later use.

Rather than taking the full loan amount as a lump sum, borrowers can allocate a portion of their funds into a cash reserve, which functions like a line of credit.

The key advantage? You only pay interest on the money you withdraw. If your cash reserve remains untouched, no interest is charged on those funds.

How a cash reserve works

When setting up a reverse mortgage, you can divide your loan into three components:

✔ Lump sum upfront: A portion of your loan is available immediately for major expenses like paying off an existing mortgage, home renovations, or travel.

✔ Regular instalments (top-up income): Borrowers can receive a set amount at regular intervals (e.g. monthly or quarterly) to supplement their retirement income.

✔ Cash reserve: The remaining loan balance is set aside in a reserve, allowing borrowers to access funds as needed, on their own terms.

Accessing your cash reserve

Once your cash reserve is established, you can withdraw funds whenever needed, subject to lender terms. This ensures you have ongoing access to money for both planned and unexpected expenses—without taking on unnecessary debt.

Managing interest costs

One of the biggest advantages of a cash reserve is that interest is only charged on the funds you withdraw. This means you can minimise interest costs by drawing down money only when necessary.

Benefits of a cash reserve

1. Financial flexibility
   A cash reserve allows you to adapt to changing financial needs. Whether it’s home repairs, medical expenses, or day-to-day living costs, you have funds available when required.
2. Cost efficiency
   Because interest is only charged on the money you use, you avoid unnecessary interest costs on the full loan amount. This can help preserve more of your home equity over time.
3. Long-term security
   By setting aside funds in a cash reserve, you maintain access to future funds, providing peace of mind and added security in retirement.

Example: How a cash reserve works in practice

Let’s say a homeowner is approved for a $300,000 reverse mortgage.
🔹 They take $100,000 upfront to pay off their existing mortgage and cover home improvements.
🔹 They receive $2,000 per month for five years as top-up income ($120,000 total).
🔹 The remaining $80,000 is placed in a cash reserve.

Here’s what happens:
✅ The $100,000 lump sum immediately starts accruing interest.
✅ The $2,000 top-up income is drawn monthly, and interest is only charged as the funds are used.
✅ The $80,000 cash reserve remains untouched, meaning no interest is charged on this amount until the borrower chooses to withdraw from it.

This setup gives the borrower complete control over their finances, ensuring they have access to funds when needed—without accumulating unnecessary interest.

Considerations before using a cash reserve

While a cash reserve is a valuable feature, here are some things to keep in mind:
🔹 Lender restrictions: Some lenders may have conditions on how and when you can access your cash reserve, such as minimum or maximum withdrawal amounts.
🔹 Impact on your estate: Any funds withdrawn (plus interest) will reduce the amount of equity in your home, which could impact the inheritance you leave behind. It’s important to discuss your financial plans with your family.

Reverse mortgage protections in Australia

Reverse mortgages in Australia are government-regulated to protect borrowers. Key safeguards include:

✔ No Negative Equity Guarantee (NNEG): You will never owe more than your home’s value—even if property prices decline.
✔ Ownership rights: You retain full ownership of your home, and you’re free to sell it at any time.
✔ Clear loan terms: Reverse mortgages come with transparent terms, so you know exactly what to expect in terms of interest, fees, and conditions.
✔ Independent legal advice: All borrowers must seek independent legal advice before taking out a reverse mortgage to ensure they fully understand the loan agreement.

Is a cash reserve right for you?

A cash reserve is an excellent option for retirees looking for flexibility and security in managing their reverse mortgage funds. It allows you to access money when needed, minimise interest costs, and maintain control over your financial future.

At Your Home Equity, we specialise in reverse mortgage broking for Australians over 55. Our expert team can help you explore your options and tailor a reverse mortgage solution to suit your needs.

If you’d like to learn more about how a reverse mortgage cash reserve could work for you, contact us today for a free, no-obligation consultation.