Mortgage stress spreads as buyers fear negative equity

The prognosis for almost half a million Australian households is concerning.

Persistent stress can lead to many health problems, such as high blood pressure, heart disease, stroke, obesity and diabetes.

With 450,539 now experiencing mortgage stress, medical centres around the country might be seeing an influx of patients.

Across the 77 ranked mortgage stress postcodes nationally, the number of stressed households rose by a net 31,318 in Q3 2026, an increase of around 7.5 per cent in just three months.

Melbourne’s property market may be in a prolonged downturn, but the city still had the dubious distinction of being the most mortgage stressed city in the country.

A mortgage stress report produced by OurTop10, found that Victoria’s top 10 added 10,501 stressed households in three months (up 11 per cent), the largest rise of any market, and now holds 104,325, the biggest total in the index.

Mansour Soltani, Head of Research, OurTop10, said the western growth belt of the city is now moving as fast as the south-east, and Roxburgh Park in Hume has overtaken the Casey corridor as the state’s biggest single hotspot.

“Melbourne is now the centre of the story: more stressed households than any other market, and the biggest rise, but the sharpest moves are in the regions, namely Cairns, Toowoomba and Launceston.”

Nationally, the number of stressed households has increased by 79,072 over the past year, a rise of about 21 per cent and the third consecutive quarterly increase.

The biggest postcode jump was recorded in Manunda, Cairns, where mortgage stress rose 156 per cent. Tasmania recorded the fastest state-level increase, at 13.7 per cent.

But it is not just households in more affordable outer suburbs and regional centres feeling the pinch.

Affluent suburbs showing signs of strain

The fastest-growing pockets of severe mortgage stress are emerging in some established and relatively affluent suburbs.

OurTop10’s Q3 report found severe stress had increased 610 per cent in Drummoyne over the quarter, 289 per cent in Hornsby, 256 per cent in Elwood and 140 per cent in Hawthorn.

In Perth, western suburbs such as Mount Claremont, Wembley and Cottesloe topped the state’s severe-stress list.

Severe stress includes households behind on repayments, seeking hardship assistance, refinancing or selling.

The numbers challenge the assumption that mortgage stress is largely confined to households that bought at the lower end of the market or stretched themselves to get into a first home.

Established homeowners may have accumulated substantial equity, but that does not necessarily mean their household budgets are immune to higher repayments, rising living costs or changes in income.

Large percentage increases can be startling, but they need to be considered alongside the number of households affected and the underlying conditions in each postcode.

Still, the direction of travel is difficult to ignore.

FOMO gives way to another fear

Falling property values are adding another concern for buyers and recent purchasers.

Aaron Scott, co-founder of real estate agent comparison service bRight Agent, calls it Fear of Negative Equity (FONE).

For years, FOMO, or the fear of missing out, encouraged buyers to act before prices moved further beyond their reach. Now, after six consecutive months of national price declines, some are wondering whether buying today could leave them financially worse off tomorrow.

“FOMO has driven the Australian property market for years. People were afraid that if they didn’t buy now, they would never be able to afford a home,” Mr Scott said.

“Now we’re seeing the other side of that fear. People are asking themselves whether buying today could leave them financially worse off tomorrow.”

The concern is particularly relevant to buyers entering the market with small deposits.

Consider someone buying a $700,000 property with a five per cent deposit of $35,000. A five per cent fall in the property’s value would erase that initial equity before transaction costs and other expenses are taken into account.

The buyer would still have a mortgage to repay, despite having lost the financial buffer they worked so hard to accumulate.

“Buying with a small deposit can be a pathway into homeownership, but it also means you have less of a buffer if property prices fall,” Mr Scott said.

That is not necessarily a disaster. Someone who can comfortably meet their repayments and remain in the property has time to ride out a downturn.

The position is considerably more difficult for a household already struggling with repayments, particularly if job loss, relationship breakdown or another change in circumstances forces a sale.

Negative equity becomes a more immediate problem when the proceeds from selling a property are insufficient to repay the outstanding mortgage.

The first home buyer dilemma

The expanded five per cent deposit scheme has helped more than 100,000 first home buyers enter the market, according to the figures supplied by Housing Australia.

For those buyers, the prospect of falling values presents a dilemma. Waiting could mean finding a more affordable property if prices continue to decline, but nobody knows when the market will turn. Buying now could secure a home, but it could also mean watching its value fall in the short term.

“FOMO tells you to buy before prices get away from you. FONE makes you worry about taking on a mortgage that could leave you exposed if prices keep falling,” Mr Scott said.

“Neither fear should make the decision for you.”

That advice applies to buyers and existing owners alike.

Mortgage stress and negative equity are related, but are not the same thing. A household can struggle to meet repayments even when its property has substantial equity, while another can be in negative equity without having any immediate difficulty servicing its loan.

The risk increases when the two collide. Falling property values, little equity and a household that can no longer comfortably afford the mortgage is a recipe for high-level financial stress.

With mortgage stress rising across most cities, regional centres and even affluent suburbs, the diagnosis does not look particularly positive just yet.