House Prices Are Falling: What Should Mortgage Holders Do?

If house prices are falling, the most useful thing a mortgage holder can do is check their own position.

That means knowing your current loan-to-value ratio (LVR), seeing what another fall in your property value would do to your equity, reviewing refinancing options before you urgently need them, and keeping enough cash available to cope with a change in circumstances.

Negative equity is still uncommon in Australia. Recent buyers with small deposits, however, have much less room for prices to fall.

Cotality’s latest figures show why the issue is worth paying attention to. Its national Home Value Index fell 0.7% in July 2026, the largest monthly decline since December 2022. Sydney values fell 1.4%, Melbourne 1.2%, Brisbane 0.6% and Adelaide 0.2%.

The Reserve Bank says fewer than 1% of Australian borrowers are currently in negative equity. Only a small share of that group is estimated to be having severe difficulty with their repayments.

There is a more immediate issue for some borrowers: how much equity they have left if prices keep falling.

REA Group analysis found that only 87 first-home buyer households who bought through the expanded 5% Deposit Scheme were currently estimated to be in negative equity. That was less than 0.2% of approximately 48,000 purchases.

But 48% of those buyers had an equity position of 5% or less.

For mortgage holders, that is the number worth watching.

Here are six things to do if you have a home loan when house prices are falling.

1. Check Your LVR Now

Your LVR compares your mortgage with the current value of your property.

The calculation is:

LVR = loan balance ÷ property value × 100

Suppose you owe $720,000 on a property worth $900,000. Your LVR is 80%.

If the property falls 10% to $810,000 while your loan remains around $720,000, the LVR rises to about 88.9%.

You still have positive equity, but a lender assessing the property now sees a different position.

This becomes particularly relevant if you want to refinance or access equity.

If you bought recently or expect to refinance, it is worth knowing roughly where your LVR sits before you need to make a decision.

2. See What Another 5% Or 10% Fall Would Do To Your Loan

You do not need to predict whether house prices will fall another 5%, 10% or 20%.

Run the numbers anyway.

A homeowner with a $450,000 mortgage on a $900,000 property has a large equity buffer. Someone who owes $850,000 on the same property has very little.

The REA analysis of recent 5% Deposit Scheme buyers illustrates this difference. Very few of those borrowers are currently underwater, but almost half have 5% equity or less.

Consider a first-home buyer who purchased an $800,000 property with a 5% deposit.

Their starting loan would be about $760,000.

If the property fell 5% to $760,000 before much principal had been repaid, the property value and loan balance would be roughly equal. A further fall could put the borrower into negative equity.

That is a simplified example. Mortgage balances reduce as principal is repaid, and individual properties will not necessarily move at the same rate as a national or capital-city index.

It nevertheless shows why your starting LVR matters.

How Likely Is Negative Equity If House Prices Keep Falling?

Current evidence suggests widespread negative equity would require a much larger downturn.

RBA modelling estimated that even with a hypothetical 20% fall in house prices, around 5% of households would be in negative equity.

The risk is concentrated among newer owners who bought with large outstanding mortgage balances, particularly if they purchased close to a market peak.

So the national chance of negative equity may be low while the risk for a particular recent buyer is considerably higher.

3. Review Refinancing Before You Urgently Need It

You do not need to reach 100% LVR before a falling property value starts affecting your lending options.

Suppose you owe $780,000 and expect your property to be worth $1 million.

At that valuation, your LVR is 78%.

If a lender values the property at $950,000, the LVR becomes about 82.1%.

Nothing has changed about the amount you owe, but the refinance is now being assessed at a higher LVR.

Refinancing above 80% may still be possible, but Lenders Mortgage Insurance (LMI) can apply, and the outcome also depends on serviceability, credit history, the property, loan purpose and lender policy.

If you already know you may want to refinance in the next 6 or 12 months, reviewing the loan early gives you time to understand what is actually available.

Waiting until you have to refinance can leave you with fewer choices if the property has been valued at a lower amount in the meantime.

4. Keep Enough Cash In Reserve

Paying down a mortgage builds equity. That does not mean every spare dollar should automatically be put into the loan.

Cash reserves matter when conditions are uncertain.

A homeowner who can comfortably meet repayments and has enough savings to deal with a period of lower income may be able to sit through a property downturn without making any major changes.

The appropriate balance between paying down debt and keeping money available will vary by household. What matters is that you consider your cash position alongside your equity position.

5. Know When Negative Equity Actually Becomes A Problem

Negative equity means your mortgage is larger than the current value of your property.

For example, if your home is worth $850,000 and your mortgage balance is $900,000, you have approximately $50,000 in negative equity.

It does not automatically mean you are behind on repayments.

For someone who can continue servicing the mortgage and does not need to sell or refinance, a period of negative equity may have limited immediate impact.

The position becomes more difficult when the homeowner needs to act.

For instance, if homeowners who bought at a market peak are forced to sell because of unemployment, family breakdown, etc.

• Selling can crystallise the problem because the sale price may not be enough to clear the mortgage. Selling costs can increase that shortfall further.
• Refinancing can also be difficult at very high LVRs because another lender has to be willing to take on the debt against the property’s current value.

For that reason, the point to review your mortgage is usually before you reach negative equity, not after.

6. If Repayments Are Getting Difficult, Speak To Your Lender Early

A falling property value and difficulty making repayments are separate problems.

Someone can have very little equity and comfortably make every repayment. Someone else can have substantial equity and struggle after losing income.

The position becomes much harder when both occur at the same time.

If repayments are becoming difficult, contact your lender’s hardship team early. Depending on your circumstances, a lender may be able to change the loan terms or temporarily reduce or pause repayments.

If you are considering selling because you can no longer afford the mortgage, work out the numbers first.

Get the current loan payout amount, a realistic estimate of the property’s likely sale price and the expected selling costs. If there could be a shortfall, speak with your lender and get appropriate professional advice before committing to the sale.

What If Your Home Is Already Worth Less Than Your Mortgage?

Start by confirming the position.

Check your current home loan balance and get a realistic indication of the property’s value. If refinancing is the reason you are checking, remember that the new lender’s valuation is what will matter for its assessment.

Then look at what you actually need to do.

If repayments remain comfortable and you have no need to sell or refinance, there may be no immediate transaction that turns the fall in value into a realised loss.

If you need to sell, the calculation is more important. Find out whether the expected sale proceeds will cover the mortgage and selling costs.

If you need to refinance, speak to a broker about the available options rather than assuming that a high LVR automatically rules it out.

Different lenders have different policies, although a very high LVR will generally reduce the range of options available.

Should Mortgage Holders Be Worried About Falling House Prices?

For most Australian mortgage holders, the current data does not point to an immediate negative-equity problem.

Cotality’s figures confirm that values are falling, with the downturn now extending beyond Sydney and Melbourne.

The RBA still estimates that fewer than 1% of borrowers are in negative equity.

And among recent first-home buyers under the expanded 5% Deposit Scheme, the REA analysis found only 87 households currently estimated to be underwater.

The area to watch is the group with a thin equity buffer. Almost half of those recent scheme buyers had 5% equity or less.

• For a long-term homeowner who has paid down a large part of the mortgage, another fall in property prices may make little difference to their immediate financial position.
• A recent low-deposit buyer, someone preparing to refinance or a homeowner already struggling with repayments has more reason to check the numbers.

You do not need to forecast the bottom of the property market to do that. You need to know what you owe, what your property is realistically worth and how much room sits between the two.

Concerned About What Falling House Prices Could Mean For Your Mortgage?

A Home Loan Experts mortgage broker can review your current loan balance, estimated property value, LVR and refinancing position.

We can also discuss what different property valuations could mean for your equity and the lending options available to you, so any decision is based on your own mortgage rather than a national property forecast.

Speak to our mortgage experts. Call us on 1300 889 743 or enquire online today.

This article contains general information only and does not constitute financial, legal, tax or investment advice. Property values, lender valuations, interest rates and lending criteria can change, and individual circumstances vary. Consider obtaining advice appropriate to your circumstances.