Australia’s household debt now second highest globally, but borrowing is still breaking records

Australian households are close to the most indebted in the world but that has not stopped mortgage lending from smashing through new record levels.

Australia’s household debt is approximately 112 pr cent of its GDP, trailing only Switzerland and at a level that significantly exceeds most other major economies.

Nonetheless, borrowers are queuing en-masse to load up even more.

With property prices having soared around the country, the value of new debt being taken on has elevated accordingly.

Mortgage lending smashed through the $100 billion mark in a single quarter for the first time, reaching $115.18 billion in the three months to December 2025, a 23.6 per cent year-on-year jump.

Investors are the buyers entering the market at the fastest pace.

According to data from Money.com.au, investor loans reached a record 39 per cent market share in 2025. Investor loan numbers, as opposed to loan value, grew 12 per cent annually, three times the 4 per cent growth recorded among owner occupiers.

Established dwellings comprise more than four in five of those property purchases.

Hopes for a burst in housing supply appear forlorn, with the construction pipeline still running well below capacity and borrowers largely shunning land and new dwellings.

Owner-occupier land and construction lending volumes remain 58 per cent below their 2021 peak (77,490 loans lower), despite overall owner-occupier lending rising 4 per cent annually.

Refinancing rush

Those who already have debt are trying their best to minimise its cost.

Total refinancing hit record levels in 2025, with 641,552 loans refinanced — 20 per cent higher than 2024 levels (533,839).

Unlike the US, where fixed-rate mortgages are common, more than 80 per cent of Australian mortgages are variable, making households highly vulnerable to Reserve Bank of Australia (RBA) interest rate hikes.

With the cash rate have risen this year and more rises on the horizon, further growth in refinancing activity is expected.

Refinance loans are expected to grow another 19 per cent in 2026 to 762,437 loans, based on current growth trends.

Helen Avis, Director of Finance, Specialist Mortgage, said many borrowers were still emerging from their ultra-low Covid-era fixed interest rates.

“Coming off fixed loans from 2020 to 2022 that were around 2 per cent, many borrowers are now having to refinance.

“The banks don’t necessarily offer their customers the most competitive variable rates when those fixed terms expire, so there’s heightened refinancing activity as a result.”

Simon Birmingham, CEO, Australian Banking Association, said the surge in people refinancing a mortgage was a demonstration of how competitive Australia’s home loan market was at present.

“More homeowners than ever before renegotiating their mortgage or switching lenders shows how fiercely competitive Australia’s home loan market is.

“The strong competition within the home loan market is loud and clear in this data, with 64 per cent of mortgage holders who refinanced doing so by switching to another lender.

“This is a timely reminder that it can pay to regularly check in with your lender to see if you can get better terms on your home loan or even test the broader market and see what other deals are out there.”

Interest rates outlook

With inflation in Australia resurgent again, just when it looked late last year like the RBA could take a breath, borrowers appear likely to again be the scapegoat for the heated economy.

The trimmed mean measure of core inflation, the preferred measure of the RBA, increased by 0.3 per cent in January, taking the annual rate to a 16-month high of 3.4 per cent, from 3.3 per cent in December. It has remained above the central bank’s target band of 2 per cent-3 per cent for the seventh straight month.

Stephen Smith, partner at Deloitte Access Economics, still expects the RBA to await the results of its 3 February rate hike before moving again.

“With little chance of a rate hike in March, the next live RBA meeting will be in May, when the RBA will be able to take the temperature of the economy with the benefit of seeing the March quarter inflation figures.”

Oliver Hume Chief Economist, Matt Bell, said property markets won’t be moved too much by Wednesday’s (25 February) CPI results.

“We’ve seen some robust property numbers out since markets pivoted to expectations of rate increases in November last year.

“Auction clearance rates bounced back in January and February, house price growth has slowed marginally but remains positive, new home sales for January rose and even residential lending for the December quarter was strong.

“This inflation reading isn’t likely to derail these recent trends.

“For the moment, mortgage holders and potential purchasers are still 0.5 per cent better off than the same time 12 months ago and will still be in a better position even with one more hike.”

How bad is Australia’s household debt situation?

On paper, the numbers are confronting. Household debt sitting at roughly 112 per cent of GDP places Australia among the most leveraged economies in the world. By comparison, many emerging or lower-income countries report far lower debt ratios.

But context matters.

High household debt levels are most commonly found in wealthy, developed economies with deep financial systems, stable banking sectors and high rates of home ownership.

Countries such as Switzerland, Canada and Australia share similar traits: high property values, strong institutional lending frameworks and widespread access to long-term mortgage finance. In these economies, households borrow heavily because they can — incomes are higher, credit markets are mature and property ownership is a core component of wealth creation.

By contrast, poorer nations typically show lower household debt levels not because households are financially stronger, but because access to formal credit is limited.

Mortgage markets are often underdeveloped, home ownership may be informal, and lending standards restrictive. Lower debt in those cases can reflect constrained borrowing capacity rather than financial prudence.

Ms Avis said the more important measure is serviceability.

“Despite elevated debt levels, arrears rates in Australia remain relatively low and the vast majority of borrowers continue to meet repayments.

“Strong employment, rising wages and significant housing equity buffers provide resilience.”

That does not mean there is no economic risk present.

High leverage amplifies vulnerability to sharp rate rises or a sudden labour market shock. But in the absence of a severe economic downturn or property price crash, Australia’s household debt burden appears heavy, yet broadly manageable.