Negative equity means the amount you owe on your mortgage is more than the current market value of the property. If your property is valued at $480,000 but your mortgage balance is $520,000, you are in negative equity by $40,000.
This situation is sometimes called being "underwater" on your mortgage. It can happen when property values fall after purchase, particularly if you bought with a high LVR (small deposit).
How It Happens
Negative equity typically results from one or more of the following:
- Falling property values: a market downturn reduces the value of the property below what you paid
- High LVR at purchase: buying with a small deposit (say 5% or 10%) means even a modest price decline can push you into negative equity
- Interest-only loans: if you are not paying down the principal, your loan balance stays high while the market fluctuates
- Overcapitalising on renovations: spending more on improvements than they add in value
What Negative Equity Means in Practice
Being in negative equity does not necessarily cause immediate problems if you can continue meeting your repayments and you do not need to sell. The risk becomes real in two scenarios:
- Selling: if you sell while in negative equity, the sale proceeds will not cover your mortgage. You will need to pay the shortfall out of your own funds
- Refinancing: lenders are unlikely to approve a refinance if your LVR exceeds 80% or 90%, which limits your options for accessing better rates or switching from interest-only to principal and interest
If you continue holding the property and making repayments, values may recover over time. Property markets in Australia have historically recovered from downturns, though past performance does not guarantee future results.
Reducing the Risk
The best protection against negative equity is buying with a reasonable deposit (20% or more), choosing properties in markets with solid fundamentals, and paying down the principal over time rather than relying solely on capital growth. Building positive equity early provides a buffer against market downturns.
Why It Matters for Landlords
Negative equity affects your financial flexibility and can create stress if your circumstances change. It may also affect your capital gains tax position if you sell at a loss. Monitoring your property values and loan balances regularly helps you spot potential issues early and take action, whether that means accelerating principal repayments or adjusting your strategy.
propkt tracks property values and loan details so you can see your equity position at a glance and monitor changes over time.