Bought with a small deposit? What negative equity means and what to check

Photo: Photo by Shanjir H | Photo4life AU on Unsplash.

If you've recently bought your first home, a headline about falling property prices can leave you wondering whether you've made an expensive mistake.

A lower property value can affect your options, particularly if you need to move or refinance. Understanding what it changes starts with three things: what you owe, whether repayments fit your budget, and whether you expect to sell soon.

What does negative equity mean?

Equity is the value of your home minus the outstanding loan secured against it. Negative equity means the loan is larger than the home's current value.

Here's an illustrative example. You buy a home for $600,000 with a $30,000 deposit and a $570,000 mortgage. If the loan balance stays the same, this is what different property values would mean:

This simplified example leaves out buying and selling costs, repayments and other changes to the loan. Your own calculation needs today's loan balance, rather than the amount you originally borrowed.

A smaller deposit leaves less room for prices to fall before equity becomes negative. That exposure comes with borrowing a larger share of the property's value, whether or not a government scheme helped with the purchase.

Does it mean you're about to lose your home?

Negative equity alone does not mean you've missed repayments or defaulted on your loan. The RBA explains that it is insufficient to trigger default when borrowers remain able to service their loans. It can become more difficult when repayment problems and negative equity occur together, because selling may not clear the debt.

There is also a difference between the national picture and your own position. In its October 2026 Financial Stability Review, the RBA estimated that fewer than 1% of borrowers overall were in negative equity. It also identified recent buyers and people with larger loans relative to their property value, including 5% Deposit Scheme participants, as more exposed. That overall figure does not tell us how many scheme participants are affected. Read the RBA's assessment.

Your mortgage repayment does not change simply because your home's value falls. It can still change for other reasons, such as a change in your interest rate. Westpac's explanation of negative equity sets out this distinction.

What does the government guarantee cover?

The Australian Government 5% Deposit Scheme helps eligible first-home buyers purchase with a deposit of at least 5%, without paying lenders mortgage insurance. You remain responsible for the loan's costs and repayments. See the official scheme explanation.

The guarantee is an arrangement between Housing Australia and your lender. It is not money added to your deposit, and it does not protect your home's market value or cover your regular repayments.

If a borrower defaults and the property is sold, the lender may be able to claim an eligible shortfall up to the guarantee limit. Debt can still remain after the sale proceeds and any applicable guarantee payment. Your lender can explain what applies to your loan. Housing Australia's information guide explains the guarantee and its limits.

What should you check next?

The next step depends on what is happening in your household.

If repayments are manageable and you're staying put

Start with your latest loan statement and household budget. Include costs that don't arrive every month, such as council rates, insurance, strata levies and maintenance.

Consider whether an upcoming expense or income change could make repayments harder. A national price headline cannot establish your individual home's value. If a valuation would affect a decision you're making, ask your lender what assessment it would use.

There is no reliable timetable for a property's value to recover. A plan that depends on a quick rebound leaves an important uncertainty unresolved.

If you want to refinance

Low or negative equity can narrow your options. Ask your current lender whether it can review your rate, and ask about eligibility and costs before assuming another lender can offer a replacement loan.

Where switching is possible, compare fees and the remaining loan term as well as the interest rate. A lower repayment achieved by extending the term may increase the total interest you pay. If your loan uses the government scheme, also ask how a change would affect the guarantee. Moneysmart explains what to check before switching.

If you may need to sell

Ask your lender for the loan payout figure and discuss any potential shortfall before committing to a sale. Allow for selling costs as well as the mortgage balance.

A job move, separation or change in health can make waiting impractical. If the numbers don't add up, get help understanding your options before making commitments.

If repayments are becoming difficult

You can contact your lender's hardship team before missing a payment. Explain what's changed, what you can afford and how long you expect the difficulty to last. Ask how any proposed arrangement would affect later repayments and the total loan cost. Moneysmart's mortgage help page explains how to start that conversation.

For free, independent financial counselling, contact the National Debt Helpline on 1800 007 007. You don't need to work through the options alone.

Four questions to take to your lender

1. What is my current loan balance, and what would the payout amount be if I sold?
2. What property valuation would you use if I wanted to change my loan?
3. What options are available, and how would they affect fees, repayments, the loan term and any government guarantee?
4. If my budget becomes harder to manage, how do I contact your hardship team?

You don't need a forecast for the whole property market to have a useful conversation about your mortgage. Your current balance, household budget and plans for the home give you a practical place to begin.