What happens when your property loses value, but your mortgage stays the same? For some Australian homeowners and property investors, falling house prices are creating a difficult financial situation known as negative equity.

In this episode of The CEO Breakdown, John Saade, CEO of Latitude Accountants, examines Australia’s weakening property market, Morgan Stanley’s forecast of a potential 10–15% national correction, and the risks facing buyers who entered the market with substantial borrowing.

John raises particular concerns about people purchasing properties near market peaks, including off-the-plan buyers who may discover their property is worth less than expected when settlement arrives.

But does negative equity automatically mean financial trouble? And what should homeowners and investors do if their outstanding mortgage exceeds their property’s market value?

What Is Negative Equity in Australia?

Negative equity occurs when the outstanding balance on a property loan exceeds the property’s current market value.

For example, imagine purchasing a home for $800,000 with an $80,000 deposit and a $720,000 mortgage.

If the property’s value subsequently falls by 15%, its estimated market value would decline to $680,000.

Assuming the loan balance remains unchanged, the financial position would look like this:

In this scenario, the homeowner owes $40,000 more than the property is currently worth.

Importantly, negative equity does not automatically mean mortgage default. Borrowers who can continue meeting their repayments may be able to maintain their existing loan arrangements.

Why Are Australian Homeowners Facing Negative Equity Risks in 2026?

Australia’s property market has experienced increasing pressure from higher borrowing costs, weaker buyer confidence and declining residential property values.

During The CEO Breakdown, John discusses Morgan Stanley’s revised forecast of a potential 10–15% national housing correction by the end of 2027.

He also highlights declining property transactions and weaker auction clearance rates as indicators of challenging market conditions.

Several factors can increase the likelihood of negative equity:

• Purchasing property with a relatively small deposit.
• Buying near the peak of a property cycle.
• Falling residential property values.
• Taking out additional loans against existing equity.
• Interest-only loans that do not reduce the principal balance.
• Unexpected changes in local property demand.

Recent buyers with higher loan-to-value ratios are generally more exposed because they have smaller initial equity buffers.

However, the Reserve Bank of Australia’s October 2026 Financial Stability Review estimated that fewer than 1% of borrowers were in negative equity, indicating that most Australian mortgage holders retained positive housing equity.

What Happens When Your Mortgage Is Bigger Than Your Property Value?

Negative equity can limit financial flexibility, particularly when homeowners need to sell, refinance or access additional borrowing.

1. Refinancing Your Mortgage Becomes More Difficult

Lenders generally consider a property’s current value when assessing refinancing applications.

If your mortgage exceeds that value, switching lenders may become challenging because the new lender may be unwilling to finance the full outstanding balance.

This can limit opportunities to secure alternative lending arrangements.

2. Selling Your Property Could Leave Outstanding Debt

If a property is sold for less than the outstanding mortgage, the proceeds may not cover the full loan balance.

The borrower may remain responsible for the shortfall, together with applicable selling expenses.

For example, selling a property for $680,000 while owing $720,000 could leave a $40,000 shortfall before additional transaction costs.

Borrowers considering selling under these circumstances should discuss their options with their lender and obtain appropriate professional advice.

3. Accessing Property Equity May Become Difficult

Homeowners sometimes use accumulated property equity to finance renovations, investments or other major expenses.

When property values decline, the available equity may decrease or disappear entirely.

This can restrict future borrowing opportunities and affect broader financial plans.

Why Off-the-Plan Property Buyers Face Additional Risks

John highlights off-the-plan purchases as an area requiring particular caution during a declining property market.

When buyers sign an off-the-plan contract, they generally agree to purchase a property at a specified price before construction is completed.

However, market conditions can change significantly between signing the contract and settlement.

If the property’s valuation falls below the agreed purchase price, the lender may approve a smaller loan than the buyer originally anticipated.

This could require the purchaser to contribute additional funds to complete settlement.

Buyers should carefully assess their financing arrangements, contractual obligations and potential valuation risks before committing to a property purchase.

Does Negative Equity Mean You Will Lose Your Home?

Not necessarily.

Negative equity and mortgage repayment difficulties are separate issues.

A homeowner may have negative equity while continuing to meet every mortgage repayment.

However, financial difficulties can become more serious when falling property values are combined with unemployment, reduced household income or higher borrowing costs.

If repayments become unaffordable, borrowers should contact their lender promptly to discuss available hardship assistance.

Depending on individual circumstances, options may include temporary repayment adjustments or other arrangements agreed with the lender.

How Can Property Investors Manage Negative Equity?

For property investors, falling asset values can create additional challenges when combined with ongoing holding costs and rental income uncertainty.

John emphasises the importance of assessing investments based on their underlying financial fundamentals rather than relying exclusively on anticipated capital growth.

Investors should regularly review:

• Rental income and vacancy periods.
• Mortgage repayments and interest expenses.
• Property maintenance and management costs.
• Land tax and other applicable obligations.
• Investment property deductions.
• Available cash reserves.
• Potential capital gains tax implications when selling.

Understanding the difference between accounting profit, taxable income and actual cash flow is particularly important.

An investment may generate tax deductions while still requiring substantial ongoing cash contributions from its owner.

What Should You Do If Your Property Falls Into Negative Equity?

Rather than making immediate decisions based on declining market values, homeowners and investors should first understand their financial position.

Practical steps include:

1. Review your outstanding mortgage: Confirm your current loan balance and repayment commitments.
2. Assess your property’s value: Obtain a reliable valuation rather than relying exclusively on advertised property prices.
3. Prepare a realistic budget: Determine whether existing repayments remain manageable.
4. Review your cash-flow position: Account for income, essential expenses and upcoming financial obligations.
5. Contact your lender early: Discuss available options if repayments are becoming difficult.
6. Seek professional advice: Understand the financial, taxation and legal consequences before selling or restructuring property ownership.

For investors who also operate businesses, reviewing property exposure alongside business debt and cash-flow commitments can provide a clearer picture of overall financial risk.

Frequently Asked Questions About Negative Equity in Australia

What happens if my house is worth less than my mortgage?

You are considered to have negative equity. This may make refinancing, selling or accessing additional borrowing more difficult, although it does not automatically mean you have defaulted on your loan.

Can I sell my house if I have negative equity?

Yes, but if the sale proceeds cannot cover your outstanding mortgage, you will need to address the shortfall with your lender. Obtain professional advice before proceeding.

Does negative equity affect my credit score?

Negative equity itself does not automatically damage your credit score. However, missed mortgage repayments and defaults can affect your credit history.

Can an accountant help property investors experiencing negative equity?

An accountant can assist with investment property cash-flow reviews, taxation considerations, financial reporting and assessing how property-related commitments affect your broader financial position.

Understand Your Financial Position with Latitude Accountants

Falling property values can create uncertainty, but understanding your financial position is an important first step towards making informed decisions.

At Latitude Accountants, we help Australian property investors and business owners navigate financial challenges through proactive accounting, tax planning and business advisory services.

Whether you need assistance reviewing investment property cash flow, understanding tax obligations or assessing your broader financial position, our experienced team is here to help.

Get a FREE consultation for ABN holders.

📍 Sydney Olympic Park | Marrickville | Melbourne | Loxton | Adelaide
📞 1300 706 597
📧 info@latitudeaccountants.com.au

Disclaimer

This article provides general information only and does not constitute financial, tax, accounting, legal, lending, property or investment advice. Property market forecasts are subject to change, and individual financial circumstances vary. Latitude Accountants does not provide mortgage lending or legal advice. Consult an appropriately qualified professional before making property, borrowing or investment decisions. If you are experiencing mortgage repayment difficulties, contact your lender or the National Debt Helpline on 1800 007 007.