When a federal minister discussing housing policy appears to misunderstand one of the most basic risks attached to property borrowing, it is worth paying attention.
Earlier this month, Assistant Immigration Minister Matt Thistlethwaite was questioned about falling property prices, Labor’s housing policies and the risk of negative equity among borrowers who had entered the market with small deposits. His response was that 99% of people were meeting or were ahead on their mortgage repayments and therefore could not be in negative equity.
That is not how negative equity works.
A borrower can be perfectly up to date with every home loan repayment and still be in negative equity.
Governments make decisions that influence housing demand, borrowing conditions, tax settings and the incentives available to people entering the property market. When government programs are deliberately helping buyers purchase with deposits as low as 5%, understanding the downsides as well as the upsides is crucial.
For prospective buyers and Australians who recently secured a home loan, however, the next step should not be political outrage. It should be to understand what negative equity means, whether you are exposed to it, and what you can do about it.
What negative equity means
Negative equity happens when you owe more on your home loan than your property is currently worth.
For example, if you buy a $600,000 home with a 5% deposit, you contribute $30,000 and borrow $570,000.
If the property later falls in value to $550,000 while your loan balance is still around $570,000, you owe $20,000 more than the home is worth. That $20,000 gap is negative equity.
The key point is that your loan has not increased. The value of the property has fallen below the amount you still owe.
This is also why mortgage arrears and negative equity need to be treated as separate concepts. Mortgage arrears concern your ability to meet repayments. Negative equity concerns the relationship between the value of your property and the amount of debt outstanding.
Negative equity sounds more catastrophic than it necessarily is. In many circumstances it is not an immediate cash-flow crisis.
Why recent home buyers can be more exposed to negative equity
Recent buyers can be more exposed to negative equity because they have had less time to build equity, particularly if they purchased with a small deposit.
Take the same $600,000 property. A buyer with a 20% deposit borrows $480,000, while a buyer with a 5% deposit borrows $570,000.
If the property falls to $550,000, the first buyer still has about $70,000 in equity. The second owes about $20,000 more than the property is worth, falling into negative equity.
This is why a smaller deposit means a smaller buffer if property prices fall.
That is relevant under the Australian Government 5% Deposit Scheme, which can help eligible first home buyers purchase sooner with a minimum 5% deposit. It does not make a low deposit purchase a bad decision, but it does make understanding the downside important. This is why loan-to-value ratio (LVR) is important.
An LVR measures the size of your loan relative to the value of the property securing it. A borrower with a $570,000 loan against a $600,000 property has an LVR of 95%. If the property subsequently falls to $550,000 and the mortgage has only reduced modestly, the loan may now exceed the value of the home.
For buyers considering a home loan, this is one reason the conversation should go beyond simply asking, “How much can I borrow?”
The better questions include:
- How much you are comfortable borrowing
- What deposit and cash buffer you will retain after settlement
- How repayments fit within your household budget
- How your position could change if property values, interest rates or your income move against you.
Being in negative equity does not mean you are in financial trouble
Negative equity is not automatically a financial crisis. For homeowners, this is the most important point.
If you can comfortably meet your repayments, have stable income, retain an adequate cash buffer and have no need to sell the property, a period of negative equity may have very little immediate effect on your day-to-day finances.
You continue living in the home. You continue making repayments. Each principal repayment gradually reduces the amount you owe.
Over time, the gap can also close if the property value recovers.
Property markets move in cycles, and the fact that a property is worth less today than it was at purchase does not tell you what it will be worth in five or 10 years. Equally, nobody can responsibly guarantee that values will recover by a particular amount or within a particular timeframe.
The practical point is simpler: negative equity generally becomes more serious when you are forced to do something while the equity position is weak.
So scary headlines about billions of dollars being “wiped off” the property market do not automatically translate into equivalent cash losses for individual households. A lower estimated market value only becomes a realised loss when an owner sells.
"…negative equity generally becomes more serious when you are forced to do something while the equity position is weak."
When negative equity can become a problem
The issues arise when you cannot simply hold the property and continue repaying the loan.
Selling is the most obvious example.
If you sell your home for less than you still owe on the mortgage, you may need to pay the difference yourself, subject to your lenders requirements, along with any selling costs.
That can be difficult if the sale is being driven by financial stress, unemployment, illness, relationship separation or another major change in circumstances.
Refinancing can also become harder if your property has fallen in value.
A new lender will look at how much you owe compared with what your home is currently worth. If you have little equity, or are in negative equity, you may have fewer refinancing options and could need to reduce your loan balance before switching lenders.
That is why it helps to understand your position early, rather than waiting until you urgently need to refinance.
If you are unsure how your property value or loan balance could affect your options, a broker can help you understand what may be available.
If you already own property, know your equity position
Recent homeowners do not need to obsess over weekly property estimates. They should, however, have a broad understanding of where they stand.
Start with your current home loan balance. You can easily find this on your lender’s online banking or most recent statement.
Then find a reasonable estimate of your property’s current value. Online property estimates can provide a starting point, but they are not formal valuations and can be inaccurate. Recent comparable sales in your local area may provide better context. A lender may require its own valuation if you apply to refinance or restructure.
Subtract the approximate loan balance from the approximate property value.
If your home is worth $750,000 and you owe $600,000, you have roughly $150,000 of equity before allowing for selling costs or other adjustments.
If it is worth $550,000 and you owe $570,000, you are approximately $20,000 in negative equity
What to do if you think you may be in negative equity
For most borrowers, the first response to thinking you are in negative equity should be information rather than panic.
Check your mortgage balance, review your budget and consider whether your repayments remain comfortable. If your income is secure and you expect to stay in the property, a short-term decline in estimated value may not change your immediate plans at all.
Where possible, maintaining an emergency cash buffer can also give you more flexibility if circumstances change. Additional principal repayments may improve your equity position over time, although whether that is appropriate depends on your own financial circumstances and loan structure.
The decision becomes more important if you expect to sell, refinance, move interstate, separate finances or otherwise restructure your debt.
If you are only now preparing to buy, this is also the time to think about downside risk. A discussion with a broker can help you compare loan structures, repayment implications and the amount of financial breathing room you want to retain after settlement.
Know your financial position
Housing debates tend to swing between extremes.
When property prices rise, buyers are told they are being permanently locked out. When they fall, homeowners are warned that wealth is disappearing. Neither framing is particularly helpful when you are making decisions about your own home loan. What matters more is your position.
To put yourself in the best position, you should:
- Know approximately what your property is worth
- Know what you owe
- Know how much equity you have
- Know whether your repayments are comfortable
- Know how much cash you have available if something changes.
If your numbers are healthy, negative equity may have little relevance to you. If your equity buffer is small, understanding it early gives you more opportunity to plan rather than react.
If you are preparing to buy, refinancing or concerned about how your current equity position affects your options, contact UFinancial to talk with a broker. We can help you understand your home loan position, compare lending options and work through what makes sense for you.
Property markets will move. Policy will change. Headlines will come and go.
The part you can control is understanding the debt you have, the buffer around it and the options available from here.
This article provides general information only and does not take into account your objectives, financial situation or needs. It does not constitute financial, tax or legal advice. Lending criteria, fees and conditions apply. Seek qualified tax advice regarding negative gearing, CGT or property ownership structures.
If you want clearer guidance before your next financial move, speak with UFinancial. We can help you review your lending, cash flow and broader financial position so your next decision is backed by strategy, not guesswork.
