Negative equity: your home is worth less than your mortgage. Here’s what to do.

What “negative equity” (being underwater) actually means

You have negative equity — sometimes called being “underwater” or “upside down” — when you owe more on your mortgage than your home would sell for today. If you bought with a small down payment near the peak and prices in your area have since softened, an appraisal can come back belowwhat you paid, wiping out the thin equity you started with.

On paper it feels alarming. In practice, negative equity only becomes a real problem at three specific moments: when you want to sell, when you want to refinance or borrow more, or when you want to switch lenders. If you’re staying put and can make the payments, an underwater value on a given day is mostly a number on a page — equity rebuilds as you pay down principal and the market recovers. The goal is to get through the dip without being forced into one of those three moments on bad terms.

Why low equity limits your options: the 80% rule

Here’s the mechanic behind the squeeze. To refinance — increase your mortgage, take equity out, or consolidate debt into it — a regulated lender will only lend up to 80% of the home’s appraised value. That means you need at least 20% equity. If your value dropped and your equity is thin or negative, you’re already above 80%, so refinancing simply isn’t available. The exact tool many people reach for in a cash crunch — rolling debt into the mortgage — is off the table when you’re underwater.

The same appraisal requirement is why you usually can’t switch lenders at renewal while underwater: a new lender needs a fresh appraisal and approval, and an uninsured mortgage generally can’t move above 80% of the new value. (A straight switch no longer needs the stress test since November 21, 2024, but the appraisal still has to support the balance.) That can leave you feeling stuck with your current lender — who may not lead with their sharpest rate, knowing you can’t easily leave. The counter-move is simple but important: still ask your current lender to do better, and have a broker quietly check whether any lender would take the file. Sometimes the answer is yes; when it isn’t, you at least renew on the best terms your existing lender will offer.

If the payment is genuinely unaffordable

If the new payment is beyond what you can carry, the most powerful thing you can do is also the most counterintuitive: call your lender before you miss a payment. Lenders have hardship and forbearance tools, such as temporarily switching you to interest-only, deferring a payment or two, or extending the amortization to lower the monthly amount — and they would far rather use them than pursue a power of sale or foreclosure, which are slow and costly for them too. Those options are far easier to arrange before you fall into arrears.

If your trouble extends beyond the mortgage to credit cards, lines of credit and other debt, the right professional is a Licensed Insolvency Trustee, who can explain a consumer proposal or bankruptcy — and there is a clear, well-trodden path back to a mortgage once you’re discharged. A short-term private second mortgage exists as a last resort, but it’s expensive and only makes sense with a real exit plan — never as a way to paper over a payment you can’t sustain. We’ll tell you honestly which path fits, even when the answer is “stay put and talk to your lender.”

Rebuilding equity from here

If you can hold and afford the payment, paying down principal rebuilds equity, and values may recover over time, though no one can promise when. Two levers move you back to daylight: time (values may recover, though no one can promise when) and principal paydown (every payment chips at the balance, and lump sums or accelerated payments within your prepayment privileges accelerate it). The discipline that matters most is simply not borrowing further against the home while you’re underwater. Stay current, chip the principal, let the market normalize, and revisit refinancing or switching only once your equity is back above 20%.

General information, not legal or financial advice; confirm your options with your lender and a licensed advisor.

Sources: OSFI, Guideline B-20 (80% loan-to-value cap on conventional mortgages; accessed October 2026); OSFI, straight-switch exemption from the MQR (November 21, 2024; accessed October 2026); Financial Consumer Agency of Canada, mortgage relief options (accessed October 2026), renewing your mortgage (accessed October 2026) and the Canadian Mortgage Charter (accessed October 2026).