Home buyers have been borrowing more from small banks as Australia's big banks tighten lending standards but a new report has questioned whether borrowers are about to face higher interest rates or a tougher time getting a loan.
A UBS report says the major banks' owner-occupier lending has slowed eight per cent since the banking royal commission began last December but total home lending has only marginally eased.
"This would suggest that much of the credit tightening by the major banks year to date has been offset by the smaller banks and non-banks, a situation we believe is concerning," the UBS team said.
In their report, analysts Jonathan Mott, Rachel Finn and Karyn Cao have warned smaller banks and non-bank lenders may be forced to hike rates and reduce lending volumes as borrowing costs faced by banks start to edge up.
They note the increase in bank borrowing costs this year - something also noted by the RBA in its May Statement on Monetary Policy - as a risk for smaller lenders.
"We do not believe this the continuation of rapid credit expansion by the smaller banks and non-banks is sustainable," the UBS team said.
The analysts said many smaller players such as Bank of Queensland, AMP Bank and Auswide Bank, have already raised their standard variable mortgage rates due elevated funding costs.
"We believe that many other smaller banks are likely to need to follow their lead or face a material hit to profitability," they said.
"Higher funding costs may lead to some of the smaller banks to reduce their application volumes and slow balance sheet growth."
The major banks funded around $280 billion of mortgages during the last 12 months and this was likely to drop by $56 billion this financial year, the analysts said.
By contrast, the smaller banks and non-bank lenders funded around $100 billion in mortgages over the last year.
The analysts said if the smaller banks and non-banks were to absorb the major banks' lost credit availability they would need to boost loan originations by 50 per cent.
"We do not believe the smaller banks and non-banks have the operational or funding capacity to absorb such a large increase in flow - this would be unprecedented," they said.
"For the smaller players this is akin to trying to drink from a fire-hose."