What is negative home equity?

Having negative equity in your home means you would still owe your lender if you were to sell it. It typically happens after a property market crash or in the event that a property suffers major damage or significant issues are uncovered, thereby reducing its market value.

Generally, homeowners can overcome negative equity with time as markets recover or they pay down their mortgage. Thus, negative equity really only becomes a problem if a property must be sold, as the sale proceeds might not be enough to repay the loan.

What causes negative home equity?

Negative equity may come about when:

• A person buys at the top of a market cycle or with a small deposit
  Homebuyers who put down deposits of less than 20% and/or buy at market peaks may be more at risk of negative equity than others. Property values often move in cycles and no one ever knows if a crash is immanent. Those who put down a smaller deposit hold less equity in their home and might be more susceptible to finding themselves in the red if property prices fall.

• A local economy suffers a downturn or disaster 
  Properties in locations susceptible to 'boom and bust' economic cycles or natural disasters can realise sharp value falls in such events. Mining towns are often at risk of 'bust' cycles if resource values take a turn, while a township that experiences floods, fires, or other natural disasters can see property values impacted.

• A property suffers significant damage or disruption
  If a person's home falls into disrepair - whether due to an event or lack of maintenance - they might find their property's value fall below their mortgage balance. 

Some Australians found themselves in negative equity positions after they purchased properties in mining and regional towns at the height of the resources boom of the 2000s. At that time, properties in resource-rich areas were selling at prices far above their historical values and fetching rents significantly higher than many capital cities. Investors flowed into the market, further fuelling the property bubble.

1. Let’s consider a case study

Perth investor Joe purchased a home in the Western Australian mining town of Port Headland in the mid 2000s on the advice of his brother, a fly-in-fly-out mine worker. Joe paid $700,000 for a modest two-bedroom property, taking out a loan of $650,000. It was quickly rented to mine workers for $1500 a week during a chronic rental shortage in the region.

The rental property was paying for itself until the resources sector slowed as the world economy was hit by the Global Financial Crisis. With cuts to mine production, many workers left the town, reducing rental demand. In a relatively short period, Joe’s property's value fell to $500,000 and the rental income no longer covered his loan payments. Not only did this leave him with considerable financial shortfall, it also meant selling the property would not provide enough to discharge the loan.

How common is negative home equity in Australia?

Given the Australian property market’s propensity to rise in value, relatively few home loans in Australia are in negative equity. As at July 2025, the Reserve Bank of Australia estimated the nearly no Australian home loans were in negative equity.

This is unusual in a rising interest rate environment when home values generally fall. But Australia’s property market has remained buoyant after its post-pandemic boom, fuelled in part by high population growth.

When does negative equity become a problem?

Being in negative equity can make it difficult for a mortgage holder to refinance. This can be particularly frustrating if there are more attractive interest rates and terms on the market than the homeowner’s current loan. 

Negative home equity also presents a problem when selling. As with any home with a mortgage, the proceeds of the sale are used to pay off any remaining debt. When the sale amount falls short of what’s owed to the lender, the homeowner may have to make up the difference in another way. This may be through accessing savings or selling off another asset to make up the shortfall.

Mortage advisor Chris Wisbey, general manager of Scene Finance, says he’s rarely seen a negative equity situation during his 20-year career.

“That’s because there are generally safeguards along the way in the lending process to ensure suitable buffers,” Mr Wisbey told Savings.com.au.

“If I was to advise a borrower in that situation, I would urge them to do everything possible to pay down as much debt on the loan as they could - whether that’s through taking a second job or taking maximum advantage of offset or redraw facilities.

Selling at loss is one thing but going down the mortgagee in possession path is the last option you want to take when you lose your asset and still owe money for it.”

Indeed, if a seller can’t make up the funds to discharge the mortgage, the lender may opt to involve their mortgage insurer. The insurer will step in to pay the shortfall but will have to recoup the amount from the seller. This can be an involved and expensive process.

How to avoid negative home equity

Purchasing a home with a larger home loan deposit is good insurance against slipping into negative equity. Many lenders recommend at least a 20% deposit. Simply put, larger deposits ensure higher home equity from the outset.

Another way to increase equity is to simply keep up home loan repayments, paying both the principal and interest. There are also many ways to pay off a mortgage earlier than the term of a loan. These include switching to fortnightly or weekly payments or making extra repayments when it’s possible. Not only does this boost home equity, it can save considerable amounts of money in the long run.

Mr Wisbey says he likes to think responsible and rigorous lenders don’t allow their clients to get into negative equity positions in the first place.

“As with any loan, the advice is to do your best to pay your debt down as quickly as you can. That way you are able to build your own equity.”