Permanent Magnet Synchronous Machines (PMSMs) have been preferred for high-performance applications due to their high torque density, high power density, high control accuracy, and high efficiency over a wide operating range. During operation, monitoring the PMSM’s health condition is crucial for detecting any anomalies so that performance degradation, maintenance/downtime costs, and safety hazards can be avoided. In particular, demagnetization of PMSMs can lead to not only degraded performance but also high maintenance cost as they are the most expensive components in a PMSM. In this paper, an equivalent two-phase model for surface-mount permanent magnet (SMPM) machines under permanent magnet demagnetization is formulated and a parameter estimator is proposed for condition monitoring purposes. The performance of the proposed estimator is investigated through analysis and simulation under different conditions, and compared with a parameter estimator based on the standard SMPM machine model. In terms of information that can be extracted for fault diagnosis and condition monitoring, the proposed estimator exhibits advantages over the standard-model-based estimator as it can differentiate between uniform demagnetization over all poles and asymmetric demagnetization between north and south poles.