Negative equity: what if your home is worth less than your loan?

You can be in negative equity and keep making every repayment. You can also miss repayments while you still have plenty of equity. The first is about what the property is worth. The second is about meeting your loan obligations.

Negative gearing is different again. It describes an investment's income being lower than its deductible expenses. It doesn't tell you whether the property is worth more or less than the mortgage.

Suppose you bought for $700k with a $35k deposit and borrowed $665k. If the value falls to $630k while the loan balance is still $665k, you have $35k of negative equity. This example leaves out purchase costs and any repayments already made.

Equity is the property value minus the loan balance. In this example, $630k minus $665k is negative $35k. The loan-to-value ratio, or LVR, is $665k divided by $630k: 105.6%.

A smaller deposit leaves less room for a fall in prices. Interest-only repayments don't reduce the loan balance, and borrowing more against your home can also reduce that buffer. Don't base a plan on prices recovering by a particular date.

Use our LVR calculator to check the ratio. For a refinance, the lender's accepted valuation matters more than an online estimate.

Our 5% Deposit Scheme guide explains how the guarantee works. It helps with the deposit requirement, but doesn't protect you against a fall in your home's value.

The RBA's October 2026 Financial Stability Review estimated that fewer than 1% of borrowers were in negative equity. Recent buyers and people who borrowed a larger share of their property's value were more exposed. That's a national estimate, not a valuation of your home.

In PropTrack's 17 September 2026 analysis, economist Luc Redman estimated that 480 households using the expanded 5% Deposit Scheme were in negative equity, about 1% of participants. The calculation used August price data and assumed a 5% deposit with no savings in an offset. It wasn't a count of mortgage defaults.

Those figures describe different groups, so they shouldn't be compared as if they're the same measure. A national average can also hide a much larger fall in a particular suburb or type of property.

If a headline has you worried, I'd want to see your loan balance, how the value was estimated and what you need to do next. A suburb price index can't tell us what a lender will value your particular home at.

If the repayments are manageable and you don't need to sell, there's time to work through the options. If you need to move in 3 months, the same equity gap is much more pressing. That's why I'd check your plans before making a call about the loan.

A lower valuation is not, by itself, proof that your loan is in default. Check the alleged default against your loan and mortgage documents.

A lender arranging another valuation is not the same as calling in the loan. The valuation gives the lender information. Demanding repayment generally requires an actual default under the loan or mortgage.

If the lender relies on a value-related term, ask it to identify the term and the alleged breach, and have your solicitor review the notice.

That does not make every contract identical. Your signed loan and mortgage documents still matter, particularly for business lending, company borrowers, cross-collateralised loans or a loan that is not covered by the National Credit Code.

Moving the whole loan to another lender is usually difficult when you owe more than the property is worth. The new lender needs the loan to fit its current LVR, income and property rules. A good repayment record helps, but it doesn't remove the equity gap.

I'd first check whether the valuation is reasonable and whether your current lender will review your rate. Staying with that lender can be worth comparing when a new loan won't fit. A rate reduction isn't guaranteed.

If you have cash available, we can calculate how much would be needed to reach a lender's limit, including refinance costs. I wouldn't suggest emptying your emergency savings just to make an application fit.

Even positive equity doesn't guarantee a refinance. A $600k loan against a $680k home is 88.2% LVR. Reaching 80% would mean reducing that loan to $544k, a $56k difference before costs. Some lenders consider lending above 80%, with their own conditions and possible mortgage insurance.

Our refinance guide covers the costs to compare. If the valuation looks wrong, see how to challenge a bank valuation. Recent comparable sales and errors in the valuation are more useful than the price you hoped for.

The sale needs to cover the lender's payout figure and your selling costs. In the $665k loan example, a $630k sale leaves a $35k loan shortfall. If selling costs are another $20k, you need $55k altogether. The $20k is an example allowance, not a quote for your sale.

Speak with the lender and your solicitor before signing a sale contract if the proceeds won't cover everything. You need an agreed way to deal with the shortfall and release the mortgage. Handing back the keys doesn't automatically wipe out the remaining debt.

Lenders mortgage insurance protects the lender. It doesn't cancel the money you owe. Our mortgage default guide explains what happens if repayments have also fallen behind.

If one lender holds more than one property as security, a fall in one value can affect the release or refinance of another property. Our cross-collateralised loan guide explains how those loans are linked.

Contact your lender's hardship team early if you can't make the next repayment. Explain what has changed and what you can realistically pay. Don't wait for a better valuation or assume refinancing will solve it.

Moneysmart's mortgage hardship guide explains how to ask for help. A financial counsellor can help with the debt, and a solicitor should review any default notice or court papers.

Paying down the loan reduces the equity gap, but you still need money for bills and unexpected costs. Compare the benefit of an extra repayment with the cash buffer you'd have left.

Money in an offset account can reduce the interest charged while remaining in a separate account. It doesn't reduce the loan's outstanding principal by itself. Don't subtract the offset balance from the loan and assume a new lender will use that figure for its LVR assessment.

I wouldn't recommend a renovation just because the valuation came in low. Spending $30k doesn't mean the bank will add $30k to the value. Borrowing to fund the work also increases the debt. Get costings and evidence of the likely value before committing.

For ways to reduce the balance without relying on price growth, see our guide to paying off your home loan faster.

For a regulated home loan, the National Credit Code generally requires the borrower to be in default and receive a compliant notice before enforcement begins. The notice generally gives at least 30 days from the date of the notice to fix the default. If you have given the lender a hardship notice, the Code generally also stops it starting enforcement until it has told you it will not change the contract and 14 days have passed (section 89A).

If the default is fixed within the notice period, the contract or mortgage is reinstated for that default. A later breach of the same type must also be fixed by the deadline. There are limited exceptions to the notice requirements, so a default notice or court document should be reviewed promptly by a solicitor or financial counsellor.