Leverage ratio is one of those financial terms that often gets tossed around in banking reports, investment pitches, and economic forecasts. But in 2025, as Australian households and businesses navigate a shifting credit environment, understanding your leverage ratio isn’t just for finance professionals—it’s crucial for anyone managing debt or considering new investments. With regulators tightening rules and lenders scrutinising borrowers more closely, the leverage ratio is quickly becoming a headline number in personal and business finance.
What Is Leverage Ratio and Why Does It Matter?
At its core, the leverage ratio measures how much debt you (or your business) are using relative to equity or assets. In simple terms, it’s a snapshot of your financial risk. A higher leverage ratio means more debt compared to your own funds, signalling higher potential returns—but also higher risk. For banks and lenders, the leverage ratio helps assess whether a borrower can comfortably meet their obligations without tipping into financial distress.
- For individuals: It’s often calculated as your total debts divided by total assets or income—think home loans, car loans, and credit cards versus your property value, savings, and investments.
- For businesses: The leverage ratio usually takes the form of debt-to-equity or debt-to-assets, and it’s a key metric for investors and creditors.
- For banks: APRA (the Australian Prudential Regulation Authority) has set minimum leverage ratios to ensure banks aren’t overexposed to risky lending—a lesson learned from global financial crises.
In 2025, with the Reserve Bank of Australia (RBA) holding interest rates at higher levels and the cost of borrowing climbing, leverage ratios are under more scrutiny than ever. Households with high leverage may feel the pinch as repayments rise, while businesses with stretched balance sheets could find new financing harder to come by.
2025 Policy Updates: How Regulators Are Changing the Game
This year, several policy shifts are reshaping the leverage landscape in Australia:
- APRA’s new leverage ratio rules: In January 2025, APRA increased the minimum leverage ratio requirement for major banks from 3% to 3.5%, aiming to curb risky lending practices and strengthen the financial system. Smaller banks must now maintain a 3% minimum. This move follows global trends, with regulators worldwide pushing for safer banking standards.
- Stricter mortgage serviceability buffers: Lenders are now required to stress-test new home loan applicants at an interest rate at least 3 percentage points above the offered rate. This means households with higher leverage ratios may find it more difficult to qualify for new credit.
- Focus on business debt: With corporate insolvencies ticking up in early 2025, banks are tightening their assessment of business leverage ratios, particularly in sectors like construction and retail, which have been hit hard by cost pressures and softening demand.
These regulatory changes mean that both individuals and businesses need to pay closer attention to their leverage ratios—because lenders and regulators certainly are.
Real-World Impacts: How Leverage Ratio Shapes Financial Decisions
The practical consequences of leverage ratio management are playing out across Australia in 2025:
- First-home buyers: With property prices stabilising in Sydney and Melbourne but interest rates still elevated, first-home buyers with smaller deposits (and thus higher leverage ratios) are facing stricter lending criteria. Many are choosing to save longer or buy with family assistance to lower their leverage and improve loan approval odds.
- Investors: Property and share investors are carefully tracking their leverage ratios. A negative gearing strategy can amplify gains—but with high leverage and rising rates, losses are also magnified. Some are deleveraging by selling underperforming assets or paying down debt to weather potential market volatility.
- Small businesses: Access to working capital is tougher for companies with high leverage, particularly in hospitality and retail. Banks are demanding stronger cash flow projections and lower debt-to-equity ratios before approving new loans.
- Banks and lenders: Financial institutions are adjusting their risk models to account for the higher cost of debt and regulatory requirements. This means more detailed checks on borrower leverage ratios and, in some cases, higher interest rates for those with elevated debt levels.
For example, a Brisbane couple who bought a home in 2021 with a 10% deposit now faces a higher leverage ratio after property values plateaued and rates rose. Their bank recently conducted a review and, due to the higher risk profile, offered less favourable terms on a planned investment loan—prompting the couple to focus on paying down their existing mortgage first.
How to Manage Your Leverage Ratio in 2025
Whether you’re a homeowner, investor, or business owner, managing your leverage ratio is all about balance:
- Review your numbers: Calculate your leverage ratio regularly—total debts divided by assets or equity. Track how it changes as you take on new loans or pay down existing ones.
- Plan for higher rates: With borrowing costs still above pre-pandemic levels, ensure your debt repayments are manageable even if rates rise further.
- Deleverage where possible: Consider paying down high-interest debt or selling underperforming assets to improve your ratio and strengthen your financial position.
- Be proactive with lenders: If your leverage ratio is creeping up, talk to your bank early about your options. Proactive management can prevent problems down the track.
Above all, remember that the right leverage ratio depends on your risk appetite, goals, and financial buffer. In 2025, with economic uncertainty and regulatory changes in play, a conservative approach is paying dividends for many Australians.
