When house prices climbed for years, equity felt like found money. Now 22 per cent of Australian homeowners, roughly 1.4 million households, have withdrawn equity in the past twelve months, and the spending pattern tells a story about how people are funding lifestyle expenses they couldn’t otherwise afford.
The biggest slice went to vehicles: 8 per cent of all homeowners used equity for a car purchase. Renovations came next at 7 per cent, followed by childcare and school fees at 6 per cent, holidays at 6 per cent, and debt recycling for investment at 3 per cent. Western Australia (28 per cent) and New South Wales (26 per cent) led the withdrawal rates.
Why it matters for inflation and rates
The Reserve Bank watches household spending closely, and big-ticket discretionary purchases, cars, travel, education, feed directly into the inflation categories that have stayed stubborn. When the ABS reported inflation drivers for the year to July, education fees and recreation expenses (which includes travel) sat alongside housing and energy costs as the main contributors.
Home equity withdrawal works as an unofficial credit card with a mortgage interest rate. It feels cheaper than a personal loan or credit card debt, but it extends the loan term and increases total interest paid. More importantly, it adds to aggregate demand at exactly the moment the RBA is trying to cool spending. Three rate hikes have already landed this year, with expectation of at least one more.
The compounding risk
Borrowing against a rising asset is one thing. Borrowing against a falling one compounds the risk in both directions.
Property prices are down across most markets from their 2021-2022 peaks. Homeowners who withdrew equity twelve months ago are now carrying more debt against a smaller asset base. If prices fall another 5-10 per cent over the next year, a realistic scenario given current credit conditions, those households face simultaneous asset erosion and higher debt servicing.
The math gets worse when rates rise again. A $50,000 equity draw at 6.5 per cent costs roughly $270 per month in interest alone. If rates climb another 25 basis points, that same draw costs an extra $10 per month, and the principal still needs repaying. For households already running tight budgets, mortgage default risk is climbing, up 18 per cent as financial buffers thin.
Who’s most exposed
Two groups carry the highest risk:
- Recent equity withdrawers in weak markets: households who drew equity in the past 6-12 months and live in areas where prices have fallen 10 per cent or more from peak. If prices drop another 5-10 per cent, loan-to-value ratios climb quickly, and refinancing options narrow.
- Discretionary spenders with thin buffers: households who used equity for holidays, cars or other consumables rather than income-producing assets. Those purchases don’t generate cashflow to service the debt, and if household income falls (job loss, reduced hours), the debt remains while the asset that funded it is gone.
Debt recycling, using equity to invest in income-producing assets, carries its own risks, but at least the investment can generate returns. A holiday generates memories; a car depreciates from day one.
The second-order effect
When enough households tap equity for consumption, it creates a feedback loop. Higher spending sustains inflation. Sustained inflation keeps rates higher for longer. Higher rates slow house prices further and squeeze household budgets tighter. That dynamic makes the next downturn sharper, because households enter it over-leveraged and asset-poor at the same time.
The wealth effect runs in reverse, too. When people feel poorer because their house is worth less, they cut discretionary spending. Retailers and service businesses feel it first, then employment softens, then mortgage stress rises.
The catch
- Equity withdrawal feels low-cost because mortgage rates are lower than credit cards, but every dollar still carries interest and extends your loan term.
- Borrowing against a depreciating asset means your debt grows as your equity shrinks, if prices fall another 10 per cent, a household that withdrew $50,000 twelve months ago could be $80,000-$100,000 worse off in net equity terms (price fall plus accumulated interest).
- Discretionary spending funded by equity doesn’t create income to service the debt, if your hours drop or rates rise again, the repayment pressure lands on your cashflow, not the asset you bought.
What happens next
Base case: equity withdrawal slows as prices stall and lending standards tighten. Households who overextended face higher repayments and shrinking refinancing options. Mortgage stress climbs modestly, defaults tick up in pockets, but most households hold.
Upside: prices stabilise sooner than expected, rates peak and start falling by late 2026, giving over-leveraged households breathing room to rebuild equity and refinance at better terms.
Downside: prices fall another 10-15 per cent, rates stay elevated into 2027, and households who withdrew equity in the past twelve months find themselves underwater or unable to refinance. Default rates climb sharply, forced sales increase, and the downturn feeds on itself.
Pressure points to watch
Three signals that risk is materialising:
- Refinancing rejection rates: if banks start declining refinance applications from borrowers who withdrew equity recently, it’s a sign loan-to-value ratios are breaching lender risk thresholds.
- Advertised sale volumes in high-withdrawal states: Western Australia and New South Wales led equity withdrawal rates, if listing volumes spike in those markets, it suggests cashflow stress is forcing sales.
- ABS household debt-to-income ratio: if this climbs while house prices fall, it confirms households are borrowing into a downturn rather than deleveraging.
What to do if you’ve already drawn equity
If you withdrew equity in the past year, pressure-test your position now:
- Calculate your current loan-to-value ratio using today’s estimated property value, not the value at drawdown. If you’re above 80 per cent, refinancing will be harder and more expensive.
- Model your repayments at 7.5 per cent, rates could go higher before they come down. If that monthly figure is unaffordable, start building a buffer now or consider selling the asset you bought (if it’s a car or investment, not a consumed holiday).
- Avoid drawing more equity unless it’s for an income-producing use or genuine emergency. Every additional dollar borrowed narrows your options if the market turns worse.
If you’re considering an equity draw, compare the true cost over the full loan term, not just the monthly repayment. A $50,000 draw over 25 years at 6.5 per cent costs roughly $106,000 in total (principal plus interest). That’s the real price of the holiday or car.
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General info, not financial advice.
