Underwater Mortgages in Australia 2025: Causes, Impacts & Solutions

As Australian property markets ride a wave of uncertainty in 2025, the phrase ‘underwater mortgage’ is making headlines again. But what does being ‘underwater’ really mean for homeowners and investors? And how are current economic trends and policy changes shaping the risk for everyday Australians?

What Does It Mean to Be ‘Underwater’ on Your Mortgage?

In simple terms, a mortgage is ‘underwater’ (or in negative equity) when the outstanding home loan balance exceeds the current market value of the property. For example, if you owe $650,000 on your mortgage but your home is now worth $600,000, you’re $50,000 underwater. This scenario can become more common during periods of falling property prices, high interest rates, or when buyers purchase with small deposits during boom years.

• Impacts of being underwater: Selling your home may not cover your debt, refinancing is harder, and you’re more vulnerable to financial stress if circumstances change.
• Who is most at risk: Recent buyers with small deposits, investors in cooling markets, and homeowners in regions where prices have dropped sharply since 2022–2023.

2025 Market Trends and Policy Updates Affecting Underwater Mortgages

The Australian property market has seen pockets of price declines, especially in outer suburban and regional areas. According to CoreLogic’s 2025 data, while capital city prices have shown resilience, some regions have experienced falls of 5–8% since 2023. This has left thousands of homeowners at risk of negative equity, particularly those who bought at the peak with low deposits.

Several recent policy and market developments are shaping the outlook:

• APRA’s loan serviceability buffer: The Australian Prudential Regulation Authority (APRA) maintained the 3% buffer on new loans, making refinancing tougher for borrowers with little equity.
• Interest rate plateau: While the RBA has paused hikes in early 2025, mortgage rates remain elevated, increasing repayments and slowing price growth.
• Government support measures: The Albanese government has extended targeted relief for first-home buyers and mortgage holders facing hardship, but eligibility remains strict.

For homeowners who fixed at ultra-low rates in 2021–2022, the so-called ‘mortgage cliff’ has arrived. As those loans revert to higher variable rates, monthly repayments can spike by hundreds of dollars, increasing the risk of arrears or forced sales for underwater borrowers.

What To Do If You’re Underwater: Practical Strategies for 2025

Being underwater isn’t necessarily a disaster, but it requires careful management. Here’s how Australians can respond in 2025:

• Stay the course if you can: If you can afford your repayments, riding out the downturn may be the best option. Historically, Australian property prices recover over time.
• Talk to your lender early: Banks are under regulatory pressure to offer hardship options, such as payment pauses or interest-only periods, especially for borrowers in negative equity.
• Explore government hardship schemes: The National Debt Helpline and state-based mortgage relief programs can provide short-term support or legal advice.
• Consider renting out a room or the property: Boosting your income can help cover higher repayments and reduce financial pressure.
• Avoid ‘fire sales’: Selling in a panic can lock in losses. If you must sell, seek professional advice to negotiate with your lender about shortfalls.

Recent examples show banks are more willing to work with borrowers than in past downturns. In 2025, a combination of regulatory scrutiny and consumer advocacy means lenders are expected to exhaust all alternatives before pursuing foreclosure.

Looking Ahead: Will Underwater Mortgages Become a Crisis?

Most economists do not predict a US-style foreclosure wave in Australia. Our market structure, regulatory oversight, and culture of full-recourse loans provide a buffer. However, the risk of negative equity is real for thousands of households, particularly if unemployment rises or interest rates stay higher for longer.

The best defence is knowledge and early action. If you’re concerned about your property’s value or struggling with repayments, now is the time to review your options and engage with your lender or a financial counsellor.