With the Australian property market facing unprecedented volatility in 2025, the term “underwater mortgage” is no longer just financial jargon — it’s a reality for thousands of homeowners. As house prices have softened and interest rates remain elevated, negative equity is emerging as a key issue for both new buyers and long-term mortgage holders.
What is an Underwater Mortgage?
An underwater mortgage, also known as negative equity, occurs when the outstanding balance on your home loan exceeds the current market value of your property. For example, if you owe $700,000 on your mortgage but your property is now valued at $650,000, your mortgage is underwater by $50,000. This can make selling, refinancing, or even switching lenders significantly more difficult.
Why does this matter? Underwater mortgages can limit your financial flexibility, and in severe downturns, they may expose you to greater risks if you’re forced to sell or your circumstances change.
Why Are More Australians Underwater in 2025?
- Property Price Corrections: Following the boom of 2020–2022, Australian property values have cooled in many markets. CoreLogic’s March 2025 data shows median home prices in Sydney and Melbourne are down 7–10% from their 2022 peaks, pushing recent buyers into negative equity.
- High Interest Rates: Despite some relief in late 2024, the RBA’s cash rate remains at 4.35% in 2025, keeping mortgage repayments high and limiting buyers’ ability to refinance to better deals.
- Rising Cost of Living: Inflation has moderated but remains stubbornly above 3%, squeezing household budgets and making it harder for some to keep up with repayments or build equity through extra payments.
- Lending Practices: Buyers who entered the market with low deposits (5–10%) during the lending surge of 2021–22 are particularly at risk, especially in regional markets where price drops have been steeper.
What Are the Risks of Being Underwater?
Negative equity does not immediately affect your daily life if you’re able to keep making repayments, but it can present serious challenges:
- Difficulty Selling: If you need to sell, you’ll likely owe your lender the difference between your sale price and your loan balance out of pocket.
- Limited Refinancing Options: Most lenders require at least 20% equity to refinance at the best rates. Underwater homeowners may be stuck with higher repayments or expiring fixed rates.
- Financial Stress: Life events — such as job loss, illness, or divorce — can force sales at a loss, leading to additional debt and credit damage.
- Reduced Mobility: Being “stuck” in a home can limit your ability to relocate for work or family reasons.
Real-world example: In Perth’s outer suburbs, property prices have dropped by up to 12% since 2022. A buyer who purchased with a 5% deposit in mid-2022 could now face negative equity of $30,000 or more, making it nearly impossible to refinance or sell without a loss.
What Can You Do If Your Mortgage Is Underwater?
If you suspect or know your property is worth less than your loan, here are steps you can take:
- Keep Making Repayments: Continue paying on time to avoid default and further financial stress.
- Talk to Your Lender: Banks are required by ASIC to offer hardship variations if you’re struggling. You may be able to restructure repayments temporarily.
- Explore Government Support: In 2025, the Federal Government’s expanded Mortgage Relief Scheme can provide limited assistance to eligible homeowners facing temporary hardship.
- Increase Your Equity: Consider making extra repayments (if possible), or use offset/redraw facilities to gradually reduce your principal.
- Seek Professional Guidance: Mortgage brokers can help you assess whether refinancing, loan modifications, or even a negotiated sale are realistic options.
It’s also important to keep an eye on market trends. Some analysts expect a modest property recovery by late 2025, particularly in major capitals, which could help some homeowners regain positive equity over time.
Conclusion: Staying Proactive in a Challenging Market
Being underwater on your mortgage is never ideal, but it’s not the end of the road. With the right strategies and support, most Australians can weather the storm and work toward positive equity as the market recovers. The key is to stay informed, communicate with your lender early, and take action before financial stress builds.
