2 September 2026 * 10 minute read

Negative equity occurs when the amount you still owe on your home loan is greater than your property's current market value. For example, if your loan balance is $500K and your property valuation is $450K that means you have negative equity in your home.

It can be one of the biggest financial risks facing Australian homeowners and property investors, because it makes it more difficult to refinance your asset, sell at a profit, or access your equity.

Negative equity can be a particular risk during periods of falling property prices, or if you've bought using a small deposit. While being in negative equity doesn't automatically mean you're in financial trouble, it could limit your financial flexibility and may become an issue if you're forced to sell your home.

In this article, you'll learn more about what negative equity is, what causes it, and what it might mean for you. We'll also explore some practical strategies to help reduce the risk of negative equity occurring – and outline some options available if you find yourself owing more on your mortgage than your property is worth.

What you’ll learn

• Factors that can cause negative equity for property investors and owner occupiers
• Why negative equity doesn’t necessarily mean you’re in financial trouble
• The difference between negative equity and overcapitalisation
• What negative equity means for your credit score
• Ways you could reduce the impact of negative equity

Key take outs

• A negative equity position occurs when the amount owed on a property is greater than the value of that property.
• If your financial situation permits, you might consider holding on to the property and continuing your mortgage repayments to reduce outstanding debt, while awaiting a potential increase in the property's value.
• Do plenty of research before becoming a property owner, find out what’s happening in the national and local housing market, and try not to pay more than the property’s market value.

Factors that can cause negative equity

When you take out a car loan to buy a new vehicle, you may expect negative equity if the vehicle depreciates significantly in value. But when it's a property purchase, you'd be forgiven for expecting an increase in value – which is why a value drop can take investors by surprise. It’s one of the main causes of negative equity, but there are others.

• Falling property prices
  This can be due to:

  • Economic downturn in an area due to factors such as pit closures in mining towns.
  • Rising interest rates reducing buyer demand.
  • Local oversupply of homes or apartments.
  • Changes to local infrastructure or amenities that make an area less desirable.
  • Changes to legislation such as that impacting negative equity for property investors.

• Buying with a small deposit
  The lower your deposit, the less equity you have at the outset, so even a relatively modest fall in property prices can push the balance of your loan above the property's value. Aim for a larger deposit if you can, to help reduce this risk.

• Interest-only loans
  During an interest-only period on a loan, repayments don't reduce the principal – so borrowers may be more vulnerable to negative equity if prices fall.

• Adding costs and fees into a loan
  Borrowers who use their home loan to finance costs such as lenders mortgage insurance (LMI), construction overruns or other borrowing expenses increase their loan balance, thus reducing starting equity and increasing the risk of negative equity.

• Borrowing against home equity
  Using equity to finance renovations, investment properties or other major purchases increases the amount owed, reduces equity and could increase risk.

• Forced sales during a downturn or changes in personal or financial situation
  Negative equity often becomes a significant problem when homeowners must sell during a weak market due to job loss, a relationship breakdown, illness, financial hardship or relocation.

Why negative equity doesn’t necessarily mean you’re in financial trouble

Negative equity may improve over time if your property's value increases, your loan balance reduces, or both. So, unless you're forced to sell, being in negative equity doesn’t necessarily mean you’re in strife.
For investors with several properties, having a property in negative equity might not be so bad, provided your overall portfolio is positive.

Whether you’re an owner occupier or property investor, you might want to avoid selling during any market downturn – because that’s when you’re likely to realise an actual loss.
In a hold situation, maintaining cash flow is key. You’ll want to keep receiving rental income in order to cover loan payments and other costs.

The difference between negative equity and overcapitalisation

Overcapitalisation means you’ve spent too much money on your home and you’re unlikely to recoup the money you’ve spent if you sold. Renovations may increase the value of a home, but there’s a point when upgrades add no further value.

What negative equity means for your credit score

Being in a negative equity situation doesn’t impact your credit score – your credit score is mainly impacted by your repayment history.
If you’re worried about negative equity and your credit history, the key is to meet your payment commitments – including mortgage repayments and personal loan repayments.
If you’re struggling to make your home loan monthly payments (whether you’re in negative equity or not), you should talk to your bank immediately. Most lenders have financial assistance specialists that can work with you to find a way through difficult situations.

Ways you could reduce the effect of negative equity

If you find you’re in a negative equity position with your current property, there may be actions you can take to reduce its impact. For example, simply keep making repayments until the property's value increases and your loan balance reduces. Mortgage repayments for your home loan don’t change just because your property’s value has dropped.
Other things you might consider doing include:

1. If your personal circumstances allow, improve the property’s value, without increasing debt. For example, if you have savings, you might consider renovating the bathroom or kitchen in an investment property to modernise it and improve its current value, as well as its rental appeal.
2. Watch the market. As your home increases in value, your negative equity decreases, so keep an eye out for any trends in the suburb and surrounding area that may play into your favour.
3. Avoid taking risks that could interrupt your immediate cash flow and force you into a sale.
4. Don't feel trapped in a 'mortgage prison', thinking you're stuck with your current arrangement. While refinancing might be difficult when you’re in negative equity as lenders require a certain level of equity, you may be able to negotiate for a better interest rate with your current provider. Increasing home loan repayments with a lower interest rate may help you pay off your principal faster and assist in regaining positive equity.

Use our repayment calculator to see the benefits of extra repayments.

If you want to reduce the risk of negative equity across your property portfolio, you might decide to diversify your investments. For example, don’t buy multiple properties in one suburb. Instead, diversify across multiple suburbs, cities or states, so if one property’s value decreases, your other properties could balance out the loss.

Tips on how to manage negative equity

Here are some tips to help avoid a negative equity situation with your real estate:

1. Remember, property is an investment.
   Ultimately, you’re looking for growth in home value and positive equity. So, whether you’re an owner occupier or an investor, it pays to do your homework before you buy. Research all the factors relating to the property’s potential to improve in value, and if possible, don't buy at the peak of the market.
2. Look for property with opportunities for increased value.
   For example, a new home that's close to proposed infrastructure upgrades – such as a new train line, hospital, shopping centre, or school.
3. Buy in popular or upcoming suburbs.
   Invest where other people want to live and buy homes.
4. Be disciplined.
   Avoid paying too much for a property to help prevent negative equity – and always establish a strict limit before attending an auction.
5. Don’t put so much value into your property that it would be hard to get your money back.
   Think about what would happen if you had to sell quickly. Look for high value, low-cost ways to add value.