Deleveraging isn’t just another finance buzzword. In 2025, it’s a powerful trend shaping how Australians spend, borrow, and invest. With cost-of-living pressures, rising interest rates, and new policy measures, many households and businesses are rethinking their debt—and the knock-on effects are rippling through the economy. Whether you’re a homeowner, investor, or just curious about where the economy’s heading, understanding deleveraging is essential.
What Is Deleveraging and Why Is It Happening Now?
Deleveraging is the process of reducing debt by paying it down or selling assets. For households, that often means making extra mortgage repayments, consolidating high-interest loans, or curbing spending to avoid new debt. For businesses and governments, it can involve asset sales or stricter budget controls. But why is deleveraging front and centre in 2025?
- Rising Interest Rates: After a decade of cheap money, the Reserve Bank of Australia (RBA) has maintained a higher cash rate throughout 2024-25, pushing up repayments on variable-rate mortgages and business loans.
- Cost-of-Living Crunch: Ongoing inflation in energy, groceries, and rents has squeezed household budgets, making debt less affordable.
- Regulatory Pressure: APRA’s 2025 lending guidelines have tightened serviceability assessments, discouraging banks from risky lending and prompting more borrowers to reduce leverage.
As a result, Australia’s household debt-to-income ratio—which peaked above 190% in early 2023—has started to edge down for the first time in years. Major banks like CBA and Westpac have reported a noticeable uptick in early repayments and lower demand for new credit cards and personal loans in their recent 2025 half-year results.
How Deleveraging Impacts Australian Households
For many families, deleveraging is a practical response to tougher financial conditions. Here’s what it looks like on the ground:
- Extra Mortgage Repayments: With fixed-rate loan ‘cliffs’ expiring in 2024-25, many borrowers are making lump sum payments or switching to offset accounts to minimise interest costs.
- Downsizing Assets: Some homeowners are selling investment properties or downsizing their primary residence to free up cash and cut debt exposure.
- Spending Shifts: Credit card balances are falling, and there’s a shift towards debit and ‘buy now, pay later’ platforms with stricter limits.
Real-world example: Melbourne couple Jess and Tim, both in their late 30s, refinanced their mortgage in early 2025 to take advantage of a competitive fixed rate. They used savings built up during the pandemic to pay down $40,000 of principal, reducing their monthly repayments by $320. “It’s given us breathing room with everything getting more expensive,” says Jess.
Wider Economic Effects: A Double-Edged Sword
While deleveraging can make individual households more resilient, it has complex effects on the broader economy:
- Slower Consumer Spending: As Australians channel more income into debt repayments and less into retail, hospitality, and travel, GDP growth slows. ABS data for Q1 2025 shows retail turnover flatlining, with discretionary sectors (like electronics and fashion) hit hardest.
- Property Market Adjustment: Fewer investors and upgraders mean property price growth is subdued, particularly in Sydney and Brisbane. CoreLogic data shows national home values up just 1.3% in the year to May 2025.
- Financial Stability: On the upside, lower debt levels make both households and banks less vulnerable to future rate shocks or economic downturns. APRA’s 2025 Financial Stability Review notes that mortgage arrears remain low by historical standards, thanks in part to proactive deleveraging.
For policymakers, the challenge is to balance the need for financial resilience with the risk of stalling economic momentum. Recent Treasury modelling suggests that if deleveraging accelerates too quickly, it could weigh on jobs and investment, especially in construction and retail.
Smart Strategies for Deleveraging in 2025
So, what’s the best way to approach deleveraging this year? Here are some practical tips for Australians looking to reduce debt without sacrificing quality of life:
- Prioritise High-Interest Debt: Pay off credit cards and personal loans before focusing on your mortgage, as these carry the highest costs.
- Review and Refinance: With lenders competing for business in a slower market, compare rates and consider refinancing to a better deal.
- Use Offsets and Redraws: Park spare cash in your offset or redraw facility to cut mortgage interest while maintaining flexibility.
- Automate Extra Repayments: Set up regular transfers—even small amounts add up over time.
- Stay Informed on Policy Changes: Monitor APRA and RBA announcements for shifts that could affect your borrowing power or repayment options.
Remember, deleveraging isn’t just about cutting back—it’s about building a more secure financial foundation for the future.
