With Australian lending standards tightening in 2025 and regulators keeping a close eye on household debt, the gross leverage ratio has become a hot topic for anyone looking to borrow—whether it’s for a home, a business, or investment. But what exactly is the gross leverage ratio, and why should it be on your radar?
What Is the Gross Leverage Ratio?
In simple terms, the gross leverage ratio compares your total debt to your gross income. It’s a quick snapshot that banks and lenders use to gauge your risk as a borrower. The higher the ratio, the greater the perceived risk—meaning you might find it harder to secure a loan or get competitive rates.
For individuals, this typically means dividing all your outstanding debts (think mortgages, car loans, credit cards, personal loans) by your annual gross (pre-tax) income. For businesses, it’s total liabilities divided by total assets or equity, depending on the context.
- Example (Individual): If you have $500,000 in debt and earn $100,000 gross per year, your gross leverage ratio is 5.0.
- Example (Business): A company with $2 million in liabilities and $500,000 in equity has a gross leverage ratio of 4.0.
Why Gross Leverage Ratio Matters More in 2025
The gross leverage ratio isn’t new, but it’s taken on new significance in 2025 as Australian regulators and banks respond to economic uncertainty and rising interest rates. Here’s what’s changed this year:
- APRA’s Ongoing Scrutiny: The Australian Prudential Regulation Authority (APRA) continues to push for responsible lending, with guidance urging banks to pay close attention to borrowers whose gross leverage ratios exceed 6x. This means if your total debts are more than six times your gross income, you may be flagged as higher risk.
- Interest Rate Pressures: After several RBA hikes in 2023 and 2024, household debt servicing costs have climbed. Lenders are now stricter about how much debt they’ll approve relative to income, making the gross leverage ratio a key hurdle.
- Business Lending Shifts: For SMEs, banks are stress-testing gross leverage ratios more aggressively, especially in sectors vulnerable to economic swings (like retail and hospitality).
In effect, your gross leverage ratio can make or break your application for a new mortgage, investment loan, or business overdraft in 2025.
How to Manage and Improve Your Gross Leverage Ratio
If you’re planning to borrow or refinance this year, keeping your gross leverage ratio in check is essential. Here’s how to take control:
- Pay Down High-Interest Debt: Target credit cards and personal loans first—these weigh heavily on your ratio and cost more in interest.
- Boost Your Income: Any increase in gross (pre-tax) income—whether via salary, side hustles, or investment returns—improves your ratio instantly.
- Avoid Unnecessary Borrowing: Think carefully before taking on new loans or buy-now-pay-later plans, especially if you’re already near the 6x threshold.
- Consider Debt Consolidation: Rolling multiple debts into a single, lower-interest loan can reduce your repayments and improve your perceived risk profile.
- For Businesses: Review your balance sheet regularly, trim excess liabilities, and reinvest profits to build equity. This keeps your leverage ratio healthy and attractive to lenders.
Real-World Scenarios: The Gross Leverage Ratio in Action
Let’s look at how the gross leverage ratio plays out for different Australians in 2025:
- First Home Buyers: With property prices stabilising but rates high, lenders are scrutinising leverage ratios more closely. A couple earning $140,000 jointly with $700,000 in proposed mortgage debt would be right at the 5x mark—comfortable, but any extra debt could push them into high-risk territory.
- Investors: Property and share market investors often have higher gross leverage ratios, but banks in 2025 are less tolerant of borrowers above 6x unless they have substantial assets or rental income buffers.
- Small Businesses: A hospitality business seeking expansion finance may need to show a gross leverage ratio below 4x to satisfy bank risk models, especially after the sector’s COVID-era volatility and ongoing cost pressures.
Looking Ahead: Will Gross Leverage Ratios Stay in the Spotlight?
With household debt-to-income ratios still among the world’s highest, APRA and the RBA are unlikely to relax their focus on gross leverage ratios anytime soon. Expect these numbers to remain central to credit assessments, and for lenders to reward lower-risk borrowers with better deals.
Staying on top of your gross leverage ratio isn’t just about ticking a box—it’s about putting yourself in the best possible position to access credit when you need it, on your terms.
