With Australia’s property market entering a period of uncertainty in 2025, negative equity has become a pressing concern for thousands of homeowners. As interest rates hover above 4% and some regional property values slide, understanding negative equity—and knowing how to respond—has never been more important.
What is Negative Equity and How Does It Happen?
Negative equity occurs when the value of your property falls below the outstanding balance on your mortgage. For example, if you owe $700,000 on a home now valued at $650,000, you’re in negative equity. This situation can arise from:
- Falling property prices—recent CoreLogic data shows that some regional markets have dropped by 5–10% since late 2023.
- High loan-to-value ratio (LVR) borrowing—homeowners who bought with a small deposit in the last property boom are at greater risk.
- Economic shocks or localised downturns—job losses or oversupply in certain areas can accelerate price drops.
In 2025, APRA’s latest mortgage stress data suggests that around 4% of new borrowers are at risk of falling into negative equity, especially in outer-metro and regional suburbs.
Why Negative Equity Matters: The Real Risks
Negative equity isn’t just a number on paper. It can have real financial and emotional consequences, including:
- Limited refinancing options: Lenders may refuse to refinance or offer less competitive rates to borrowers in negative equity, even as fixed-rate mortgages expire and revert to higher variable rates.
- Difficulty selling: If you need to move for work or family, selling your home may leave you owing money to the bank after the sale.
- Vulnerability to foreclosure: While banks are reluctant to repossess, households facing job loss or divorce may be forced to sell at a loss.
- Psychological stress: Many Australians feel trapped or anxious when their biggest asset is worth less than their loan.
The Reserve Bank of Australia (RBA) noted in its March 2025 Financial Stability Review that negative equity can slow household spending and add to financial instability, especially if unemployment rises.
What Can You Do If You’re in Negative Equity?
If you find yourself in negative equity, it’s important to act strategically—not panic. Here are some practical steps:
- Keep up repayments: As long as you’re meeting your mortgage payments, your lender is unlikely to take action, even if your property is in negative equity.
- Talk to your lender: In 2025, major banks have hardship teams and may offer solutions like repayment pauses or interest-only periods for those genuinely struggling.
- Review your budget: Tighten spending where possible and consider making extra repayments if you can—chipping away at the principal will help reduce the equity gap over time.
- Wait it out: Property cycles move in waves. If you don’t need to sell, the market may recover and restore your equity position in coming years.
- Explore government support: Some states, like Victoria and Queensland, have introduced targeted support for homeowners in hardship as of 2025, including short-term grants and mortgage relief schemes.
Most importantly, don’t make hasty decisions like selling at a loss unless absolutely necessary. Seeking independent financial advice (not product advice) can help you weigh up your options.
2025 Market Outlook: Is Negative Equity Here to Stay?
Forecasts from major banks, including CBA and Westpac, suggest that while national prices may stabilise by late 2025, pockets of negative equity could persist in high-growth regions that saw the sharpest pandemic-era price surges. Factors influencing the outlook include:
- Interest rates: The RBA is expected to hold rates steady for much of 2025, with possible cuts only if inflation cools further.
- Population growth: Net migration remains strong, particularly in capital cities, which could underpin demand.
- Government intervention: New shared equity schemes and expanded first home buyer support may help stabilise entry-level markets.
Ultimately, negative equity is a real but manageable risk for many Australians. With the right information and a steady approach, most homeowners can navigate this challenging patch and emerge in a stronger position as the cycle turns.
