Negative Equity Risk: What Low-Deposit Home Buyers Need to Know Right Now
Some Australian home owners who bought with a 5% deposit are now at risk of owing more than their property is worth. Here's what that means and what to do.
A Sydney home owner who bought in Marrickville now fears her property is worth less than she paid for it — and possibly less than what she still owes the bank. It's a situation known as negative equity, and with property values softening in parts of Australia, it's a risk that's becoming more real for buyers who entered the market with small deposits.
What Is Negative Equity?
Negative equity occurs when the current market value of your home falls below the outstanding balance on your mortgage. In simple terms: if you sold today, the sale proceeds wouldn't cover what you owe the lender.
For most home owners with significant equity built up over years, a moderate price dip is uncomfortable but manageable. The danger zone is for those who bought recently with a deposit of just 5%, because there's very little buffer before the numbers go underwater.
Why Low-Deposit Buyers Are Most Exposed
When you purchase a property with a 5% deposit, you're borrowing 95% of the purchase price. On a $900,000 home, that's an $855,000 loan from day one. Add in stamp duty, legal fees, and other purchase costs — which don't add to the property's value — and your effective equity position is even thinner than it looks on paper.
If the market dips even 5–10% in the months after you buy, you can find yourself in negative equity territory before you've made a meaningful dent in the principal. First home buyers who used government low-deposit schemes to get into the market over the past two to three years are particularly worth watching in this regard.
Which Markets Are Showing Signs of Softening?
Sydney's inner-west — where Marrickville sits — has seen price movements cool after the strong post-pandemic run-up. Melbourne has similarly experienced pockets of value correction, particularly in apartment-heavy areas and outer growth corridors where supply has increased.
Not every suburb is experiencing the same conditions. Tightly held, high-demand areas tend to hold value better than newer estates or high-density unit blocks. But broad price softness across a metro area can drag down even well-located properties.
What Happens If You're in Negative Equity?
Being in negative equity doesn't automatically mean disaster — but it does significantly limit your options:
- You can't refinance easily. Most lenders won't offer competitive rates, or any loan at all, if your loan-to-value ratio (LVR) has blown out past 80–90%.
- You can't sell without covering the shortfall. If your home sells for less than you owe, you still have to repay the full loan balance.
- You may need lender's mortgage insurance (LMI) again if you try to restructure or move lenders.
- Stress can compound quickly if you're also dealing with higher repayments from rate rises or a change in personal circumstances.
The key point: negative equity becomes a serious problem only if you need to sell or refinance. If you can continue meeting your repayments and sit tight, values have historically recovered over time in Australian capital cities.
What This Means for You
If you bought in the last two to three years with a small deposit — especially through a low-deposit government scheme — it's worth getting a current appraisal of your property's value and checking your remaining loan balance. You don't need to panic, but you do need to know where you stand.
For anyone still in the market looking to buy, the lesson is clear: a larger deposit doesn't just save you on LMI — it creates a genuine financial cushion if values move against you. Even stretching from a 5% to a 10% or 15% deposit can make a meaningful difference to your resilience.
If you're concerned about your current position, speak to your lender or a licensed mortgage broker sooner rather than later. Options are always wider when you act before a problem becomes a crisis.
