Home loan borrowers are turning to smaller lenders.

The stricter regulatory restrictions and the cooling housing market are slowing the credit demand among the biggest banks in Australia. However, it seems like borrowers are turning to shadow banks for their mortgage needs.

Citing an analysis by UBS's Jonathon Mott, Business Insider Australia said that banks composed of smaller lenders have seen credit growth gaining traction – and this is something to worry about.

Over the past three months, major banks' housing finance commitment growth eased to 3.7%.

"This compares to 5% growth for the system as a whole. By comparison the smaller banks and non-banks — excluding the regionals — were growing their books at around 12% annualised over the quarter to May," he said.

Mott added that this resulted in the proportion of major banks’ share of overall credit growth to shrink to 75%, the lowest level since the global financial crisis in 2008.

"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," he stressed.

However, Mott projected that this trend would not continue for long, as smaller banks would not be able to raise mortgage issuance by more than 50% from the nearly $100bn it recorded last year.

“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,” Mott said.

"We are concerned that a regulatory mismatch has been created, whereby the focus on lending standards and complying with responsible lending is heavily skewed towards the major and regional banks."

But for Mott, once the regulators see fewer risks arising from the mortgage practices of bigger banks, they will be able to focus on these shadow banks.


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Home loan commitments drop across Australia