Mental health problems are inseparable from the environment. With virtual reality (VR), computer-generated interactive environments, individuals can repeatedly experience their problematic situations and be taught, via evidence-based psychological treatments, how to overcome difficulties. VR is moving out of specialist laboratories. Our central aim was to describe the potential of VR in mental health, including a consideration of the first 20 years of applications. A systematic review of empirical studies was conducted. In all, 285 studies were identified, with 86 concerning assessment, 45 theory development, and 154 treatment. The main disorders researched were anxiety (n = 192), schizophrenia (n = 44), substance-related disorders (n = 22) and eating disorders (n = 18). There are pioneering early studies, but the methodological quality of studies was generally low. The gaps in meaningful applications to mental health are extensive. The most established finding is that VR exposure-based treatments can reduce anxiety disorders, but there are numerous research and treatment avenues of promise. VR was found to be a much-misused term, often applied to non-interactive and non-immersive technologies. We conclude that VR has the potential to transform the assessment, understanding and treatment of mental health problems. The treatment possibilities will only be realized if – with the user experience at the heart of design – the best immersive VR technology is combined with targeted translational interventions. The capability of VR to simulate reality could greatly increase access to psychological therapies, while treatment outcomes could be enhanced by the technology's ability to create new realities. VR may merit the level of attention given to neuroimaging.