RBA Warns of Negative Equity Risk for Recent Borrowers

Recent Home Buyers Face Greater Equity Risk as Property Market Softens

RBA Says Most Australian Borrowers Remain Resilient, but High-LVR Buyers Should Watch Their Equity Position

Australia's housing market downturn is creating a new consideration for homeowners and property investors: **how much equity is sitting behind their mortgage?**

While the Reserve Bank of Australia says the overwhelming majority of Australian mortgage holders remain financially resilient, its latest Financial Stability Review highlights that some recent property buyers are more exposed to falling home values than others. This is particularly relevant for borrowers who purchased recently with smaller deposits and therefore started their loan with a high loan-to-value ratio, or LVR.

Most Australian Mortgage Holders Still Have Strong Equity

Despite declining property values during 2026, the broader picture remains relatively reassuring. According to the RBA, less than 1% of borrowers are currently estimated to owe more on their mortgage than their property is worth. This situation is known as negative equity.

Negative equity occurs when the outstanding mortgage balance becomes greater than the current market value of the property. For example, a buyer purchasing a home for $700,000 with a relatively small deposit may have limited equity from the beginning. If the property's value subsequently falls significantly while the loan balance remains high, that owner's equity position can become very thin — or potentially negative. By comparison, homeowners who purchased several years ago and benefited from previous increases in property prices generally have much larger equity buffers.

Why Recent Buyers Face Greater Risk

The RBA has identified recent purchasers and borrowers with higher LVR loans as being more likely to experience negative equity during a housing downturn.This includes some first-home buyers using the Australian Government's 5% Deposit Scheme. Buying with a smaller deposit can make home ownership accessible sooner, but it also means the buyer begins with less equity. When property prices are rising, this may be less noticeable because capital growth can quickly increase the owner's equity. When prices are falling, however, the opposite can occur.

A relatively modest decline in a property's value can significantly reduce the equity position of someone who entered the market with only a small deposit. Importantly, this does **not** mean that borrowers using the scheme are automatically experiencing financial difficulty. The RBA reports that arrears and hardship among participants remain contained, while first-home buyer arrears more broadly also remain low.

Negative Equity Doesn't Automatically Mean Mortgage Stress

There is also an important distinction between **negative equity** and being unable to repay a mortgage.A homeowner can technically have little or negative equity while continuing to make every mortgage repayment on time. Problems become more serious when several pressures occur together — for example, falling property values combined with job loss, reduced income or an inability to meet mortgage repayments. For this reason, employment conditions remain particularly important.

The RBA says ongoing strength in the labour market has continued to support Australian households' ability to service their debts. Mortgage arrears have increased slightly during 2026 but remain around pre-pandemic levels, suggesting widespread household mortgage distress has not emerged. Why Equity Matters When Refinancing

Equity can become particularly important when homeowners want to refinance. Banks generally look at the relationship between the value of a property and the outstanding mortgage when assessing a refinancing application. If a home's value falls while the loan balance remains relatively high, the borrower's LVR increases. That can reduce refinancing flexibility. A homeowner who originally purchased at an 80% LVR, for example, could find their effective LVR increasing if their property's market value declines. This does not necessarily prevent refinancing, but it can affect the range of lenders, loan products and rates available. Borrowers with very high LVRs may therefore need to carefully review their position before making major financial decisions.

What This Means for Melbourne's Western Growth Corridor

The changing market deserves particular attention across Melbourne's western growth corridor, where significant volumes of new housing and first-home buyer activity have occurred over recent years.

Buyers looking across areas such as Wyndham, Melton and surrounding growth locations may now find more properties available and potentially greater room for negotiation than during stronger market conditions.However, purchasing simply because prices have fallen should not be the only consideration.

Buyers should assess: - how comfortably they can manage mortgage repayments if interest rates remain elevated; - how much cash they will retain after paying their deposit and purchasing costs; - whether they have an emergency financial buffer; - the realistic market value of the property they are purchasing; - local housing supply and future development; - employment accessibility and infrastructure; and - whether they are planning to hold the property long enough to manage normal market fluctuations.

A cheaper purchase price is valuable, but **financial resilience after settlement can be just as important as negotiating the purchase itself.

Investors Should Pay Close Attention to LVR

For property investors, loan-to-value ratios should also form part of the risk assessment.

Falling property values can reduce usable equity that investors might otherwise rely on to refinance, restructure debt or fund another property purchase. An investor with several highly leveraged properties may therefore be more sensitive to a market correction than an investor holding substantial equity.

Rental income, vacancy risk, mortgage costs, land tax, maintenance expenses and expected holding periods should all be considered alongside potential capital growth. In the current environment, purchasing based entirely on expectations of rapid short-term price appreciation carries greater risk.

The RBA's Stress Scenario Provides Important Perspective

The Reserve Bank's analysis also provides some reassurance about the strength of household balance sheets. Its modelling indicates that even if Australian housing prices were to experience a **large uniform fall of 20% from current levels**, only around 5% of mortgages** would move into negative equity.

That illustrates how much equity many Australian homeowners accumulated during previous periods of property growth. The RBA also emphasises that negative equity by itself does not cause a mortgage default. As long as borrowers can continue servicing their loans, they can generally remain in their homes and allow time for debt repayment and future market movements to rebuild their equity position.

Financial Buffers Matter More in an Uncertain Market

For buyers considering entering the market today, one of the strongest protections is therefore not attempting to predict exactly where property prices will move next. It is maintaining a sensible financial buffer.

A household that uses every available dollar for its deposit and borrowing capacity may have considerably less flexibility if mortgage costs rise, unexpected expenses occur or property values temporarily fall. Leaving room within the household budget can provide greater protection against those changes.

Opportunity and Risk Can Exist at the Same Time A softer housing market can create genuine opportunities for buyers.

More listings, longer selling periods and reduced competition may allow purchasers to negotiate more carefully and avoid the pressure sometimes experienced in rapidly rising markets. At the same time, falling prices reinforce the importance of buying the **right property at the right price with the right finance structure**.

For homeowners, first-home buyers and investors across Melbourne's western growth corridor, the current environment is less about trying to perfectly time the bottom of the market and more about making financially sustainable property decisions. Most Australian borrowers remain in a strong equity position. But for recent purchasers and highly leveraged buyers, understanding LVR, maintaining cash reserves and carefully assessing property value could become increasingly important as Australia's housing market continues to adjust.