Cost of Debt in Australia 2025: Rates, Trends, and Strategies

Debt is a fact of life for most Australians—whether it’s a mortgage, a business loan, or simply the credit card in your wallet. But the cost of debt in 2025 is evolving fast, with interest rates, government policy, and global trends all playing a part. If you’re borrowing money this year, understanding the true price tag attached to your debt is more important than ever.

What Does ‘Cost of Debt’ Really Mean?

At its core, the cost of debt refers to the total expense you pay to borrow money. This isn’t just the advertised interest rate—it includes all fees, charges, and, in some cases, the effects of inflation or tax deductibility. For individuals and businesses alike, the cost of debt determines how affordable (or risky) borrowing can be.

• Interest rate: The headline figure, but not the whole story.

• Upfront and ongoing fees: Application, account-keeping, early repayment, and discharge fees can add up.

• Comparison rate: A more holistic figure that includes fees, helping you compare options.

• Tax impact: For businesses, interest payments may be tax-deductible, effectively lowering the cost.

2025 Policy Shifts and Market Trends Impacting Debt Costs

This year, several key shifts are shaping how much Australians pay for debt:

• RBA Cash Rate Movements: After a series of hikes in 2023–24, the Reserve Bank of Australia has signaled a more stable cash rate in early 2025—currently at 4.35%. While this has slowed further increases in borrowing costs, rates remain well above the historic lows of the pandemic era.

• APRA Lending Standards: The Australian Prudential Regulation Authority has maintained tighter lending criteria, especially for home loans. Lenders are stress-testing borrowers at higher rates, which impacts how much you can borrow and what you’ll pay.

• Inflation Pressures: While inflation has moderated compared to 2022–23, it’s still above the RBA’s 2–3% target. This keeps upward pressure on interest rates and the overall cost of debt.

• Green Loans and Incentives: Government incentives for energy-efficient upgrades (like solar loans) are making some forms of debt cheaper, with rates for green finance products often sitting 0.5–1% below standard personal loan rates.

For example, the average variable home loan rate in Australia now sits around 6.2% (as of June 2025), compared to just 2.5% in early 2021. Small business loans typically range from 7% to 11%, depending on the lender and risk profile.

How to Calculate and Manage Your True Cost of Debt

Knowing the sticker price isn’t enough. Here’s how to dig deeper and manage your debt smarter:

• Use the Comparison Rate: Always check the comparison rate, not just the headline rate. This figure includes standard fees and is regulated for consumer loans in Australia.

• Factor in All Fees: Read the fine print—annual fees, redraw costs, early repayment penalties, and even exit fees can change the economics of your loan.

• Consider Loan Structure: Fixed or variable? Offset accounts? Interest-only periods? Each choice can alter your long-term costs.

• Review Your Tax Position: For investment or business debt, calculate the after-tax cost, as interest is often deductible.

Let’s illustrate: Jane, a Sydney homeowner, refinances her $600,000 mortgage in 2025. She chooses a loan with a 6.1% variable rate and a 6.4% comparison rate. Over 30 years, a 0.3% difference in rate means paying over $30,000 more in interest. By negotiating the rate and consolidating fees, Jane could save a substantial sum.

Strategic Borrowing: Making Debt Work for You

With rates higher than recent memory, Australians are getting creative:

• Debt Recycling: Some homeowners are using debt recycling strategies to invest and potentially boost after-tax returns.

• Offset and Redraw: Using offset accounts or redraw facilities to reduce interest paid while keeping cash accessible.

• Refinancing: Despite higher rates, competition among lenders is fierce. Cashback offers and fee waivers can sweeten the deal, but always crunch the numbers to ensure long-term benefit.

• Green Upgrades: Leveraging discounted green loans for solar, batteries, and energy efficiency upgrades lowers both utility bills and borrowing costs.

For businesses, the government’s instant asset write-off extension in 2025 can further reduce the effective cost of debt for eligible equipment purchases.