Falling house prices could be squeezing your home equity

Your home equity can be a valuable source of funds for renovations, investing or major expenses. But as property prices fall, some homeowners may find they can borrow less than they expected.

Thinking of borrowing against your home? Falling property prices could put those plans at risk.

A decline in your home's value can erode the equity you've built up, reducing your borrowing power and, in some cases, leaving you with no equity to access at all.

That scenario may become more common if the Commonwealth Bank's forecast proves accurate.

This week, the bank warned house and unit prices could fall by more than 10% in Sydney and Melbourne during 2026, cutting more than $100,000 from the value of a $1 million home.

What is home equity?

The equity you hold in your home is the difference between its market value and what you still owe on any loan you used to purchase it.

"[It's] the portion of your home's value that you own outright, so it's essentially the difference between what your home is worth and what you owe on that home," explains Blake Cullen, senior financial adviser at Evalesco.

Most banks calculate your "usable equity" - the portion of equity they'll let you borrow against -- by taking 80% of your property's value and subtracting what you still owe on your loan.

So if your property is worth $1,000,000 and the remaining balance on your loan is $500,000, your usable equity would be $300,000.

How can you access your home equity?

Accessing equity means borrowing or withdrawing an amount of money from your bank that is in proportion to the usable equity you hold in your home.

Most people do this by taking on a new or bigger loan from the bank they have their mortgage with, but talking to loan brokers or other lenders as part of a refinancing process can also help you unlock equity.

Cullen says many of his clients spend the money they get through their equity on renovations on their home, but notes that putting it towards investing has also become "more prevalent".

How will falling property prices affect your home equity?

Real estate experts say most Aussies have a decent amount of equity in their home, thanks to their properties having consistently increased in value since they've bought them.

"For the last 10 years or so that I've been doing this, it does build quite quickly," says Ruth Van Eekelen, broker with Aussie Home Loans.

"But lately we have seen it start to stall somewhat and not grow as much as it has been".

Falling real estate prices in most parts of the country have squeezed borrowers' equity.

This week, real estate data company Cotality revealed national home values had fallen for the fifth month in a row, most recently by 0.9% in August.

In some parts of the country, declines have been much larger.

When the market value of your home falls closer to the amount remaining on your loan, your equity in the property - and, by extension, the amount you can borrow - shrinks.

If your property's value reaches what you still owe on your loan or falls below it (negative equity), you won't have any usable equity on which to borrow.

Who's homes are most at risk?

Sam Gordon, founder and director of advisory Australian Property Scout, says people who have bought homes in the last year or so in expensive suburbs in large cities are at most risk of having no usable equity.

"First homebuyers who've used a 5% deposit to be able to go out and buy property -- if they were to buy in an area where the values had [fallen], there is a very decent chance they could be in negative equity... or sitting at 100% debt on home value," he says.

How to check your usable equity

Most banks have calculators on their websites which can show you your estimated usable equity.

But to use these, you'll need to know your home's value and your remaining balance on any loans.

What to watch out for before using the equity in your home

1. Make sure you've got the money to service any loans

Most bank products that let you access your equity are loans, so your bank will still want to make sure you can afford the extra costs that come with these.

"Even if you have a lot of equity in your property, that doesn't automatically mean you can access it," says Ruth Van Eekelen from Aussie Home Loans.

"You still need to have the income available, we still have to verify that you have capacity to repay [the loan]".

2. Home improvements don't automatically boost equity

Van Eekelen says another mistake home owners make is assuming any amount they've spent improving their home will automatically be reflected in the property's value and therefore be added to their equity.

"If you spend $200,000 fixing-up or doing renovations, that doesn't automatically mean you're adding $200,000 worth of value," she says.

3. Think before investing with equity

Noting the growth in people using home equity to invest, Blake Cullen from Evalesco says anyone pursuing this option should consider how changes introduced by the recent federal budget may have affected popular investments.

"You want to be having a good think around the types of investments that you want to put that money into," he says.

"Based on the changes, it's just worth having a second thought as to what is a good investment going forward."

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