Nonaccrual Loans in Australia (2025): What Borrowers & Lenders Need to Know

Australia’s lending landscape is shifting in 2025, with nonaccrual loans once again making headlines. As households and businesses navigate a trickier economic climate and lenders tighten risk controls, understanding what a nonaccrual loan is—and why it matters—has never been more important. Whether you’re a borrower, investor, or just a finance enthusiast, here’s what you need to know about nonaccrual loans in today’s environment.

What Is a Nonaccrual Loan?

A nonaccrual loan is a loan on which the lender has stopped accruing interest because the borrower is no longer making payments as agreed. In other words, the loan is considered so impaired that any additional interest revenue is unlikely to be collected. For banks and lenders, this is an accounting and risk management red flag.

• Trigger: Generally, a loan is classified as nonaccrual when payments are more than 90 days overdue or if the lender believes repayment is unlikely.
• Impact: Lenders must remove expected interest income from their books, which directly affects their reported earnings.
• Borrower’s Perspective: For borrowers, having a loan go nonaccrual can mean serious credit trouble and, in some cases, the start of collection or foreclosure proceedings.

According to APRA’s latest 2025 Prudential Standards update, Australian banks must closely monitor and report nonaccrual loans as part of their broader risk oversight—a move designed to boost transparency and stability in the sector.

Why Are Nonaccrual Loans in the Spotlight in 2025?

Nonaccrual loans tend to spike during periods of economic stress. In 2025, several factors are contributing to renewed attention:

• Rising Interest Rates: With the RBA lifting rates to curb inflation, some borrowers are struggling to meet higher repayments on mortgages and business loans.
• Cost-of-Living Pressures: Persistent inflation has left many Australians with less disposable income, increasing default risk.
• Commercial Property Slowdown: Some sectors, especially commercial real estate, are seeing higher loan defaults, pushing more loans into nonaccrual status.

According to the Australian Banking Association’s 2025 industry report, the nonaccrual loan ratio for major banks ticked up by 0.3% year-on-year, a sign that lenders are becoming more cautious about credit quality.

How Nonaccrual Loans Affect Borrowers and Lenders

The transition of a loan to nonaccrual status isn’t just an accounting technicality—it has real-world implications for both sides of the credit equation.

For Borrowers

• Credit Score Impact: A nonaccrual loan will almost always damage a borrower’s credit score, making future borrowing more expensive or difficult.
• Potential Legal Action: Lenders may pursue collections, asset seizure, or foreclosure if the loan remains unpaid.
• Limited Renegotiation Options: While some lenders may be open to restructuring the loan, this is less likely once it’s gone nonaccrual.

For Lenders

• Loss Recognition: Banks must recognise potential losses earlier, which can hit their profitability and capital buffers.
• Regulatory Oversight: APRA’s 2025 rules require more rigorous reporting and provisioning for nonaccrual loans, increasing compliance costs.
• Investor Sentiment: A rising share of nonaccrual loans can spook investors, potentially affecting share prices and funding costs for lenders.

Notably, some Australian banks have ramped up provisions for bad loans in 2025, anticipating a further uptick in nonaccrual activity as economic conditions remain challenging.

Managing Nonaccrual Loans: New Policies and Best Practices

In response to the uptick in nonaccrual loans, both borrowers and lenders are adopting new strategies and benefiting from recent policy changes:

• Loan Restructuring Incentives: The Federal Government’s 2025 SME Recovery Package includes incentives for lenders to restructure distressed business loans before they hit nonaccrual status.
• Improved Hardship Processes: Major banks have streamlined their hardship application processes, making it easier for borrowers to seek help before defaulting.
• Enhanced Disclosure: APRA now requires banks to disclose their nonaccrual loan portfolios more transparently, giving customers and investors clearer insight into credit risk.

For borrowers worried about slipping into nonaccrual territory, early engagement with your lender is crucial. Many banks now offer digital self-assessment tools and hardship calculators to help customers understand their risk and take action sooner.

Conclusion: Stay Ahead of Nonaccrual Risks in 2025

Nonaccrual loans are a warning sign for both borrowers and lenders, signalling financial stress and requiring immediate attention. With economic uncertainty lingering in 2025 and stricter regulatory scrutiny in place, understanding the implications of nonaccrual loans is essential for anyone navigating Australia’s credit markets.

Whether you’re managing a mortgage, running a business, or investing in bank shares, keep a close eye on loan performance and don’t hesitate to act early if you see warning signs. The sooner you address repayment challenges, the more options you’ll have—and the less likely your loan is to join the nonaccrual ranks.