Waterhouse was born in Hertford but brought up in Haywards Heath, West Sussex. The son of a solicitor, he was educated at St. Wilfrid’s Primary School, West Sussex and Shoreham Grammar School (now Shoreham College). After leaving the series, he began a stage career mainly because he was influenced by his older brother, Paul, to do so.

Waterhouse was a great fan of Doctor Who in his younger days. Adric was a companion of Tom Baker and Peter Davison's Doctors from 1980 to 1982. Waterhouse was the youngest male actor and youngest actor to play a companion (Sarah Sutton was the youngest female actor and second youngest to play a companion), and had only appeared in one television drama prior to being appointed in the role. He played the schoolboy Briarley in the BBC2 adaptation of To Serve Them All My Days with John Duttine.

Waterhouse returned to the sphere of Doctor Who and took part in the audio commentaries for the DVD releases of Earthshock and The Visitation released in 2003 and 2004 respectively. He also provided commentary for The Keeper of Traken, released in 2007 as part of the New Beginnings box set. Though released separately, all commentaries were recorded in the same week, as noted by Waterhouse in his commentary for The Keeper of Traken. More recently, in late 2008, he made an audio commentary, jointly with Peter Davison, Janet Fielding and Sarah Sutton for the DVD releases of Four to Doomsday and Black Orchid. He also talks about his complete tenure on the show in the featurette "The Boy With the Golden Star" dedicated to Adric on the Warriors' Gate DVD.

Waterhouse guested on a number of shows after it was announced that he would be playing Adric. This included Saturday Night At The Mill (BBC Pebble Mill, 1980) and Top of the Pops (BBC, 1980) with Dave Lee Travis. He also guested on Peter Davison's This Is Your Life (Thames TV, 1982) and Children in Need (BBC, 1985) with a range of Doctor Who actors. Waterhouse's only film appearance was in 1984's arthouse sci-fi thriller The Killing Edge, directed by Lindsay Shoentoff. Waterhouse, in a minor role, played a knife man.

In 1996 he made the science fiction pilot drama Ghostlands for MJTV Productions, and played the character Tom, alongside actors Sylvester McCoy and Jacqueline Pearce.

Waterhouse's name was used by comedians Matt Lucas and David Walliams for a character in their sketch show Little Britain. Waterhouse in the programme is an unsuccessful inventor of bizarre and ridiculous new versions of things such as board games and breakfast cereals. Little Britain has also featured two other characters named after Doctor Who companion actors, Michael Craze and Mark Strickson, while the actual programme is narrated by Tom Baker.

Waterhouse has appeared in a wide range of theatre productions in the UK, and has appeared in the Shakespeare productions A Midsummer Night's Dream (as Puck), Twelfth Night (as Fabian), Macbeth (as Fleance) and Hamlet (as the title role). He also appeared in theatre productions of I Am David, The Lion, the Witch and the Wardrobe, Brighton Beach Memoirs (West Yorkshire Playhouse), Peter Pan (directed by actor Clive Swift) and Torch Song Trilogy.

In 2006, Waterhouse self-published his debut novel, Fates, Flowers: A Comedy of New York (ThisPress). The book was republished in June 2010 by Hirst Books, along with two other books set for release later in 2010 -- "Vanitas: A Comedy of New York" and the autobiography "Blue Box Boy".

Waterhouse also wrote and appeared in his own one-man show Adventures of Huckleberry Finn (Chipping Norton and UK Tour) which was directed by actor Murray Melvin (Bilis Manger in the Doctor Who spin-off drama Torchwood in 2007).

Waterhouse has lived Connecticut in the United States since July 1998, but occasionally returns to the UK for conventions, signings, performances and recording audio commentary for the Doctor Who DVDs. He lives with his American partner.