Your Home Is Worth Less Than You Paid: What That Actually Means for Your Loan

The numbers that landed this week

Cotality's latest figures came out at the start of this week, and they're the ones people have been messaging me about. National home values fell about 0.9% in August, the fifth monthly fall in a row, leaving values roughly 3.6% below the record high set in March. Sydney led the falls again, down around 1.4% for the month and now about 7.1% below its February peak.

What makes this one land differently is how broad it has become. Around 93% of capital city suburbs recorded a fall through winter, up from roughly 46% in autumn. Sales are running about 15.5% lower than the same time last year, and agents are telling me open homes that used to get four groups through are getting two.

So the question I keep getting, usually from someone who bought in the last twelve months, is blunt: if my place is worth less than I paid, am I in trouble? The honest answer is that for most people this is far less dangerous than it feels, but there are specific situations where it genuinely matters, and it's worth knowing which one you're in.

What negative equity actually means

Negative equity just means your loan balance is bigger than your property is worth. If you owe $760,000 and the place would sell for $730,000 today, you're $30,000 in negative equity.

It's mostly an issue for recent buyers with small deposits, because they had the least cushion to begin with. Someone who bought with a 20% deposit has plenty of room before a fall eats through it. Someone who bought with 5% has almost none. A 5% deposit is gone after a 5% fall, before you even count the cost of selling.

That matters right now because a lot of people did exactly that. After the First Home Guarantee was opened up in October 2025 - no income limits, no cap on places, and a Sydney price limit of $1.5 million - the government issued 22,921 guarantees in the four months to February, roughly 75% more than the four months before. A good number of those buyers went in with a 5% deposit right as Sydney was peaking in February. If that's you, the arithmetic is uncomfortable, and I'd rather say so plainly than pretend otherwise.

Some perspective though. The RBA's March review put the share of households in negative equity at under 1%, and that was measured before most of this year's falls. That's cold comfort if you're one of them, but it does tell you this is a pocket of the market, not the whole market.

The question I get asked first: can the bank call in my loan?

This is the fear sitting underneath all of it, so let's clear it up. An Australian home loan does not work like a margin loan on shares. Your lender is not revaluing your house every quarter and demanding a top-up when the number moves. As long as you keep making your repayments, a fall in your property's value on its own does not change what you owe each month and does not trigger a demand to repay early.

Your repayment is set by three things: your loan balance, your interest rate and your remaining term. None of those change because the market moved. Your loan contract sets out your actual obligations, so read yours if you want certainty, but for a standard owner-occupied home loan that is how it works.

What genuinely gets people into trouble is missing repayments, not the valuation. Which is why the most useful thing you can do in a falling market is protect your ability to keep paying.

Where it actually bites

Negative equity becomes a real, present problem in four situations:

• You need to sell. This is the big one. A paper loss becomes a real loss the day you sign a contract. If you sell for less than you owe, the shortfall is still your debt, and selling costs make it worse.
• You want to refinance. Lenders lend against a percentage of the value, so if the value has dropped, your LVR has gone up and you may no longer fit. This is how people end up stuck with their current lender, paying a rate they could otherwise beat.
• You want to use your equity. A renovation, an investment property, helping the kids with a deposit. If the equity isn't there on the bank's numbers, the plan waits.
• You're on a low deposit and want to stop paying LMI. Getting out of lenders mortgage insurance territory takes longer when values are moving against you.

Notice what is not on that list: living in your home and paying your loan. If that's your plan for the next few years, today's value is a number on a page, not an event.

What to actually do about it

Keep paying, and protect your buffer. Everything else is secondary to this. If money is tight, talk to your lender early. Hardship arrangements exist, and using one early is far better than falling behind first.

Don't sell into it unless you have to. Sydney is down around 7% from its peak. That's meaningful, but property is a long game, and selling under pressure into a soft market is how a paper number becomes a permanent one.

Put spare money against the loan or into an offset. You can't control the value side of the equation, but you have full control of the loan side. Extra repayments shrink the gap from your end, and money sitting in an offset does the same job while staying available if you need it.

Get a real number before you assume the worst. Most people are guessing off a headline. A capital city index is not your street, and plenty of suburbs have held up better than the average. A proper estimate on your specific property takes me a few minutes and costs you nothing.

Check whether you can still refinance before deciding you can't. Lenders value the same property differently, and some are more generous than others. I've had plenty of files where one lender's valuation killed a deal and another lender's number saved it.

If you're about to buy with a small deposit

None of this is an argument against buying. It's an argument for buying with your eyes open.

If you're going in with a 5% deposit, assume you're holding the property for a good while rather than a couple of years, because equity needs time to rebuild. Keep a cash buffer after settlement instead of spending every last dollar on the deposit and costs. And don't stretch to the absolute maximum a lender will approve, because the top of your borrowing capacity is exactly where a rate rise hurts most.

The flip side of these numbers is that a softer market hands you negotiating room buyers simply did not have eighteen months ago. Fewer people at open homes and sales down 15.5% on last year is a difficult backdrop if you're selling, and a genuinely useful one if you're buying well.

Where rates sit while all this plays out

The cash rate is 4.35% and has been on hold since June, most recently at the meeting on 11 August, after three increases earlier this year. Inflation eased to around 3.5% in the year to July but is still above the RBA's 2 to 3% target, and the Board has been open that it weighed up a hike in August as well as a hold.

The next decision is 29 September, and the major banks don't agree on what's coming. NAB has been forecasting a rise in September, ANZ and CBA are pointing to November, and Westpac expects no change for the rest of the year. Nobody knows, which is the practical argument for building your plan around a repayment you can comfortably handle rather than around a forecast.

Higher rates alongside falling values is an uncomfortable combination, and it's why this has become the question of the moment. But the takeaway hasn't changed: keep your repayments safe, don't make a permanent decision because of a temporary number, and get advice on your actual position rather than the headline version of it.

If you're worried about where your loan sits against what your property is worth, I'm happy to have a free, no-obligation chat and go through it properly - what your position actually is, whether refinancing is still on the table, and what your options look like from here. With access to more than 70 lenders and eight years in lending, including my time at CBA, I can usually tell you fairly quickly whether you have a real problem or just an uncomfortable headline.

This is general information only and not personal financial advice - everyone's situation is different, so please get in touch and we'll look at yours together. Property values, interest rates and lender policy all change, so treat the figures here as a snapshot in time. For anything tax-related please speak with your accountant or a licensed adviser, and for contract or title questions your solicitor or conveyancer.

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