Negative Equity: What It Means and What to Do
ADS Team
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August 6, 2026
about 1 month ago
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In short: Negative equity means you owe more on your mortgage than the property is currently worth. It matters only if you need to sell or refinance - if you can keep making repayments and stay put, it is a paper position that time and principal reduction usually resolve.
Key takeaways
- It only becomes a real problem when you must sell or refinance.
- You cannot refinance out of negative equity - no lender will fund above value.
- Selling crystallises the shortfall, which remains a debt you owe.
- Every extra repayment does double work: it reduces debt and rebuilds equity.
How people end up there
- Buying at 95% LVR then a modest price fall - a 5% decline is enough.
- Capitalised LMI, which pushes the starting balance above the purchase price.
- Interest-only periods, where the balance never reduces while values soften.
- New builds and off-the-plan, where the on-completion valuation comes in below contract price.
What it actually blocks
| Situation | Effect |
|---|---|
| Keeping the loan and living there | No practical effect - repayments continue as normal |
| Refinancing | Blocked - lenders will not fund above value |
| Selling | You must fund the shortfall plus selling costs |
| Accessing equity | Not available - there is none |
| Repricing with current lender | Still possible - worth asking |
The practical response
- Do not panic-sell. Selling converts a paper loss into a real debt.
- Reprice with your existing lender. It requires no valuation and no serviceability test.
- Attack the principal. Extra repayments close the gap from both directions as values recover.
- Avoid interest-only. It freezes the balance exactly when you need it falling.
- If repayments are becoming difficult, contact hardship early - options are far wider before arrears accumulate.
Frequently asked questions
Can the bank force me to sell if I am in negative equity?
Not simply because of the valuation. Lenders act on default - missed repayments - not on the LVR moving against you. Keep meeting the repayments and the loan continues.
What happens to the shortfall if I sell?
It remains a debt you owe. Where LMI was in place, the insurer pays the lender and may then pursue you for the shortfall through subrogation.
How long does it take to recover?
It depends entirely on the market and your repayments. Principal reduction is the part you control - on a typical loan, several years of P&I repayments moves the position materially even with flat prices.
Related reading
- LVR Explained: Why 80% Is the Magic Number
- Financial Hardship: Your Rights Before You Miss a Payment
- Mortgage Prisoners: When You Cannot Refinance
Sources
- Problems paying your mortgage — ASIC Moneysmart
- Financial Stability Review — Reserve Bank of Australia
Information current as at 2 September 2026.
General advice warning: This article contains general information only. It does not take into account your objectives, financial situation or needs, and it is not personal credit or financial advice. Consider whether it is appropriate for you and seek advice from a licensed credit representative before acting.
Any interest rate shown is an example only and is not an offer of credit. Where a rate is quoted, the applicable comparison rate is available from the relevant lender and should be considered alongside it.
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