Eighty-seven. That is how many of the roughly 48,000 households who bought under the expanded First Home Guarantee, marketed as the 5% Deposit Scheme, since October 2025 are underwater, on analysis of Housing Australia and PropTrack data published on 17 August 2026. The national picture is calmer still: Reserve Bank Governor Michele Bullock put households in negative equity at "under 1 per cent" on 11 August, and said RBA scenarios put it at only about 5% even if prices fell 20%. The number that complicates both: 48% of that scheme cohort hold 5% equity or less, and national dwelling values have now fallen for five consecutive months.
Most coverage of this gets it wrong in both directions, either by calling 87 households a crisis or by treating a 5% deposit as 5% of protection. Neither survives the arithmetic. A 95% borrower a year into the loan does not go underwater until prices fall about 6.1%, but stops being able to sell and clear the debt at about 2.6%, and the second number is the one that decides anything.
What is negative equity, and how is it measured?
Negative equity means your loan balance is larger than your property is worth. Owe $600,000 on a property that would sell for $580,000 and you have negative equity of $20,000, and that is the entire definition. Nothing is attached to the state itself.
The RBA counts negative equity net of offset and redraw balances, which is why private survey estimates always run higher than the official ones. A borrower with $40,000 sitting in an offset account is counted as better placed by the RBA and can still fail a lender's own loan-to-value test, because the two measure different things.
For scale, the RBA's March 2026 Financial Stability Review reported less than 1% of households in negative equity, a lower share than before the pandemic, and that even under a severe 40% price decline around 80% of mortgaged households would still hold positive equity. That 40% figure is the RBA's published stress scenario. The 20% scenario quoted at the top came from the Governor's August media conference, not the Review. Much commentary has merged the two.
How far do prices have to fall on a 5% deposit?
You buy at $700,000 with a 5% deposit of $35,000, borrowing $665,000 over 30 years at 6.19%, the average rate on outstanding owner-occupier principal-and-interest loans in June 2026 in RBA statistics.
Your repayment is about $4,068 a month. After twelve months your balance is roughly $657,100, so you have paid down about $7,900 of principal and everything else went to interest. Strict negative equity (loan balance exceeding property value) therefore begins at a price fall of about 6.1%, more headroom than the "5% deposit means a 5% fall" shorthand suggests. But that is the wrong threshold to care about. The one that matters is whether you could sell and clear the debt.
| Price fall from purchase | Property value | Loan balance | Equity on paper | Cash position after selling costs |
|---|---|---|---|---|
| 0% | $700,000 | $657,100 | +$42,900 | +$17,700 |
| 2.6% | $681,800 | $657,100 | +$24,700 | $0 |
| 5% | $665,000 | $657,100 | +$7,900 | -$16,400 |
| 6.1% | $657,300 | $657,100 | $0 | -$23,900 |
| 10% | $630,000 | $657,100 | -$27,100 | -$50,600 |
Assumes a $700,000 purchase at 95% LVR, 6.19% over 30 years, twelve months in. Selling costs are a modelling choice: a 2.5% agent commission, the midpoint of the 2% to 3% national range, plus $7,700 of marketing, conveyancing and mortgage discharge fees, the midpoints of the ranges set out below.
Read the last two columns against each other. You are not technically in negative equity until prices fall 6.1%, but you can no longer sell and clear the debt once they fall about 2.6%. The gap between "underwater" and "cannot get out" is about three and a half percentage points of price, and the second number arrives first.
Why selling costs move the line the other way
A lot of published advice gets this backwards. Agent commission typically runs 2% to 3% nationally, from roughly 1.99% in South Australia to 2.96% in Tasmania. Marketing on a property in this bracket runs $3,750 to $7,500, conveyancing $800 to $2,200, and discharge and lender fees $150 to $1,000. On a $700,000 sale at the midpoints that is about $25,200, more than two thirds of the original deposit, gone before any price movement. Those costs do not raise the point at which you are underwater. They lower the point at which selling stops working.
A separate figure of roughly 8% to 10% gets confused with this one: the round-trip cost of buying and selling, stamp duty going in and commission and legals coming out. That is the growth you need before a purchase breaks even, and first-home buyers using stamp duty concessions have a smaller round trip than most. It answers a different question. If you are weighing a purchase rather than living with one, the buyer's guide to a falling market covers the other side.
Who is most exposed to negative equity in Australia
The exposure does not sit with the average owner. It sits with people who bought recently, with a small deposit, in markets that have since fallen. The RBA attributes the rise in high-LVR lending directly to the scheme: since the expansion took effect in October 2025, very high LVR borrowing has increased while borrowing at an LVR of 80% or below has decreased. Geography accounts for most of the variation from there.
| Region | Average equity held by scheme buyers |
|---|---|
| Queensland - Outback | 14.2% |
| Western Australia - Outback (North) | 12.7% |
| South Australia - Outback | 12.2% |
| Mornington Peninsula | 2.0% |
| Melbourne - Inner East | 1.9% |
| Sydney - Eastern Suburbs | 0.8% |
Housing Australia and PropTrack Home Price Index data, reported 17 August 2026. Regions are ABS SA4 areas. Estimates exclude funds held in offset accounts.
Regional scheme buyers have generally done well, because the expansion pushed competition into price-capped suburbs. Cotality, the data business formerly known as CoreLogic, found homes valued below the caps rose 6.7% between October 2025 and March 2026, against 3.6% for homes valued above them. Buyers near the caps in expensive capital city markets have almost nothing behind them.
None of that is happening against a helpful backdrop: Cotality's August 2026 Home Value Index recorded a 0.9% national fall, the fifth consecutive monthly decline, with Sydney down 1.4% in the month and 93% of capital city suburbs falling over winter, up from 45.8% in autumn. Check the date on any suburb-level figure before you rely on it, because the winter falls have overtaken most of the numbers still doing the rounds.
How to check if you are in negative equity
- Get your current loan balance from internet banking, and use the balance owing rather than the balance net of redraw.
- Note any offset balance separately, because the RBA counts it and your lender's LVR test may not.
- Estimate the property value from three comparable sales in the last 90 days on your street or in your estate, not a portal automated estimate, which lags a falling market.
- Divide the loan balance by that value. Above 100% is negative equity. Above about 95% means selling costs alone would leave you short.
- Order a bank valuation only if you are actually transacting. A formal valuation in a falling market locks the worst number available onto your file.
What happens to you day to day
Nothing.
A performing loan is a performing loan. Your lender does not revalue your property annually, and nothing in your contract triggers off your valuation. The conditions that end your scheme cover are behavioural: you stop living there, you rent it out, you borrow more, you refinance away, you sell. Renting it out is the trap, because it looks like a way to hold on and is the fastest way to end your cover. If that is the direction you are drifting, read the trade-offs on rentvesting first.
Bullock said as much on 11 August: negative equity "only matters if you are a distressed seller and you need to get rid of the property because you lose your job or for family breakdowns or things like that". Economist Saul Eslake put it more bluntly in June 2026: "Now, that's only a problem if you're planning to sell it." Curtin University's Steven Rowley adds the history: Perth fell about 17.5% between 2014 and 2019, then doubled. His advice is "sit tight, pay down that mortgage and wait it out".
When negative equity becomes a real problem
Four things convert a paper position into a real loss.
- Forced sale. Job loss, illness, relationship breakdown, or a relocation you cannot decline. This is the main one, and it is why the risk is really a labour market risk wearing a housing costume. RBA research on mortgage defaults finds that negative equity alone rarely produces default: it usually takes an income shock and falling prices together. Job loss concentrates geographically and so do arrears, and the mortgage stress map shows where. If a forced sale does happen and you have to buy back into the same falling market, the only agent in the room working for you is one you pay yourself, and GoMatch filters buyer's agents by price bracket.
- Refinancing or borrowing more. A borrower in negative equity cannot refinance to a mainstream lender, because the new loan's LVR would exceed 100%. Cash-out refinancing is typically capped at 80% LVR without lenders mortgage insurance, so at 95% that door is shut too.
- Fixed-rate rollover. The pandemic mortgage cliff is over. It ran through 2023 and 2024, and blogs recycling it in 2026 are recycling a dead story. The honest current version is smaller: borrowers who fixed in the second half of 2025, when the cash rate sat at 3.60%, rolling onto rates priced against a 4.35% cash rate. Nobody has published a credible estimate of how many.
- Thin liquidity. Cotality reports home sales tracking 15.5% below the same period last year, with Brisbane, Perth and Sydney each down more than 20% year on year. Few buyers means your realised price is worse than the index suggests. Anyone considering trading up in a falling market should model that gap.
Does the 5% Deposit Scheme cover negative equity or LMI?
You will read advice telling scheme buyers to protect the lenders mortgage insurance they have already "sunk". That advice is wrong on its face. Scheme buyers paid no LMI at all, which was the point of the guarantee, and the RBA puts the value of what they avoided at 1% to 5% of the loan amount. There is nothing sunk to protect. The exposure is all ahead of you.
| Action | Effect on your scheme cover | Consequence if LVR is still above 80% |
|---|---|---|
| Keep making scheduled repayments | Cover continues until principal reaches 80% of original value | None |
| Refinance to another participating lender, same amount and term | Cover continues | None |
| Refinance to a non-participating lender | Benefit of the scheme is lost entirely | Lender may impose LMI or other costs |
| Increase the loan amount or extend the term | Eligibility affected, cover can end | Lender may impose LMI or other costs |
| Rent the property out | Cover ends | Lender may impose LMI or other costs |
Australian Government 5% Deposit Scheme For First Home Buyers Information Guide, sections 4.3 and 4.4, edition dated 1 July 2026.
The 80% test runs on your scheduled repayments. Prepayments you can redraw are not counted.
The guarantee protects your lender, not you. Housing Australia covers the lender's shortfall, and only once the property has been sold. It covers nothing you still owe after that. Anyone telling you the government covers your negative equity has not read the guide. The eligibility rules and price caps are set out in the scheme explainer.
What to do if you are close to the line
What follows is general information about how the mechanics work, not personal advice. A licensed broker, a financial adviser or your own lender can tell you what applies to your loan.
- Panic selling rarely helps. The table above is the argument. Selling at a 5% fall converts a $7,900 paper equity position into a $16,400 cash shortfall you still owe. You cannot sell your way out of a small negative position, only crystallise it. There is a real exception. If the property is genuinely wrong for you, if a move is coming anyway, or if the holding costs over the next few years exceed the loss you would crystallise today, selling early can beat selling later. The argument here is against selling because of a number on a valuation, not against selling.
- Refinancing at the trough has a cost. A revaluation now locks in the worst number available, and leaving a participating lender can trigger LMI you have never paid. If your rate is genuinely uncompetitive, ask a mortgage broker about staying inside the participating lender panel rather than chasing a headline rate outside it.
- Many borrowers build a cash buffer before making extra principal repayments. Extra principal improves a number you only realise on sale. Cash in an offset improves your ability to keep paying, which decides whether the paper number ever becomes real, and because the RBA measures equity net of offset balances it lifts your measured position too. On that reasoning the buffer comes before extra principal, though whether it is right for you depends on your rate, your tax position and how secure your income is.
- Talk to your lender early. Under section 72 of the National Credit Code a hardship notice can be given verbally or in writing, so a phone call counts. The options worth asking for are a repayment pause, a period of interest-only repayments, a longer loan term, or capitalising arrears, and the lender must consider each on its merits. Scheme borrowers already use this channel, with 0.9% having accessed hardship support as at 30 June 2025.
- Know your serviceability position. APRA's buffer remains 3 percentage points above the loan rate, which at current pricing means first-home buyers are assessed at around 9% or higher. See what that does to borrowing capacity in 2026.
What these negative equity estimates cannot tell you
Aggregates are not your property. Cotality, PropTrack and the RBA publish index-level estimates, and an index is an average of a market you do not own. Your street, build quality and buyer pool can put you well above or below the regional average. Only a valuation tells you which.
The equity figures here exclude offset balances, as PropTrack economist Luc Redman noted. The bases also differ: the sub-1% national share is measured across all households, while the 80% stress-scenario figure is measured across mortgaged households only. Housing Australia's detailed data on LVR, arrears and postcodes describes the cohort to 30 June 2025, the pre-expansion group, not the roughly 48,000 who bought after 1 October 2025. There is no 2025-26 report yet.
Forecasts move constantly. ANZ shifted to a peak-to-trough fall of 14.5% in Sydney and about 10% across the capital cities on 11 August 2026. Numbers like that are revised monthly and the published range across the major bank forecasters is wide, so treat any single one as a view rather than the view. None of this is personal advice.
FAQ: negative equity and low-deposit loans
How far do house prices have to fall before a 5% deposit buyer is underwater?
On a $700,000 purchase at 95% LVR, a year of repayments at 6.19% leaves you owing about $657,100, so strict negative equity starts at a fall of roughly 6.1%. The threshold that matters is about 2.6%, where sale proceeds after commission and legal fees stop covering the loan.
Can I sell my house if I am in negative equity?
You can list and sell, but the sale will not clear the debt. At a 5% price fall on a $700,000 purchase, the proceeds leave you about $16,400 short after commission and fees, and that shortfall becomes an unsecured debt you still owe, which the lender can pursue like any other. Selling does not remove a small negative position, it converts it into cash you have to find.
Can I refinance my home loan if I'm in negative equity?
Realistically, no. A mainstream lender needs the new loan secured by sufficient property value, and in negative equity the new LVR would exceed 100%. Cash-out refinancing is generally capped at 80% LVR without LMI, and APRA has told banks that policy exceptions must stay prudent and limited. Staying put is usually the only option.
Does the 5% Deposit Scheme guarantee cover me if my home is worth less than my loan?
No. The guarantee protects your participating lender, not you. Housing Australia covers the lender's shortfall, capped at 15% of the property value, and only once the property has been sold. Whatever is left after that is an ordinary unsecured debt in your name, and the lender can pursue it like any other.
Negative equity in 2026: where this leaves you
The policy question underneath all this is whether a scheme that put 48,000 households into the market at 95% LVR, then watched the entry-level suburbs it helped bid up fall for five straight months, has transferred risk or merely postponed it. The RBA's answer is that the cohort is too small to threaten the financial system, and the guarantee absorbs the lender's share in any case. That is an answer about the system. Nobody has given one about the household, which is why the buffer is your job and not Canberra's.
What is true is narrower and still worth taking seriously. Nearly half the post-October 2025 cohort hold 5% equity or less, the entry-level markets that ran hardest during the expansion are now falling, and a buyer near the caps in Sydney or inner Melbourne has almost no margin. If that is you, the position is uncomfortable without being dangerous, and it turns dangerous only through a forced sale.
The standard advice is unglamorous: keep paying, build cash you can reach, leave the valuation alone, and ring the lender at the first sign of trouble rather than the last. Australians hold the average dwelling for eight to ten years on Cotality's resale data, and a monthly price index is a poor guide to a decision measured in years. The two-speed market that pushed entry-level values up in late 2025 is the same mechanism unwinding now. For the deposit maths behind this cohort, the $168,000 deposit reality is the companion read.
Sources
- Reserve Bank of Australia, "Media Conference: Monetary Policy Decision" (transcript, Governor Michele Bullock). 11 August 2026.
- Reserve Bank of Australia, "Financial Stability Review, Chapter 2: Resilience of Australian Households and Businesses" (March 2026), and Statistical Table F6 Housing Lending Rates, series FLRHOOP, outstanding owner-occupier principal-and-interest loans (June 2026).
- Reserve Bank of Australia, Research Discussion Paper, "The Determinants of Mortgage Defaults in Australia". 2020.
- Elite Agent, "Regional first-home buyers under 5% deposit scheme post double-digit equity gains", reporting Housing Australia and PropTrack Home Price Index data. 17 August 2026.
- Housing Australia, "Australian Government 5% Deposit Scheme For First Home Buyers, Information Guide" (edition dated 1 July 2026), and "Home Guarantee Scheme Trends & Insights Report 2024-25" (released 2025).
- Cotality, "Home Value Index results for August 2026" (31 August 2026), and analysis of dwelling values against the 5% Deposit Scheme price caps (23 April 2026).
- The Conversation, Steven Rowley, "Why most homeowners don't need to lose sleep over negative equity" (17 August 2026); ABC News, economist Saul Eslake on negative equity (4 June 2026); Australian Financial Review, "ANZ forecasts Sydney housing prices to fall by as much as 14.5pc" (11 August 2026).
- Canstar, real estate agent commission and selling cost guidance, citing Open Agent data (2026), and ASIC Moneysmart, "Problems paying your mortgage", covering National Credit Code section 72 (current at September 2026).
