The gap between bank and non-bank pricing of home loans has narrowed since interest rates started rising last May, with non-banks struggling to maintain their pricing advantage. Comparison site Canstar analysed rates for owner occupier variable rate loans in its database, with a loan amount of A$500,000, a loan-to-valuation ratio of 80 per cent and principal and interest repayments. In May last year the average rate offered by ADIs was 3.09 per cent, while the average for non-ADIs was 2.38 per cent – a difference of 71 basis points. On February 7 the average ADI rate was 5.82 per cent and the average non-ADI rate was 5.26 per cent – a difference of 56 bps. Canstar said the narrowing of the gap can be explained by the differences in ADI and non-ADI funding arrangements. ADIs fund most of their lending with customer deposits, where they set the rate. Banks have been passing on all the cash rate increases to their borrowers but not necessarily to their depositors. NAB did this on Tuesday, when it announced a 25 bps increase in its standard variable home loan rate but said its deposit rates were “continually under review”. Non-ADIs have not had that luxury. Last year Resimac reported a fall in the size of its loan book, saying competition was “fierce”, particularly in the prime loan end of the business where banks were offering cashback incentives. In November, mortgage aggregator AFG reported that its overall residential mortgage lodgements were down 24 per cent year-on-year but lodgements for AFG Securities, its own funded loans, were down 60 per cent. AFG chief executive David Bailey said at the time: “Interest rate increases have been quickly passed on by the major lenders, while they have been slow to pass on deposit rate increases.  “This is driving a funding advantage that smaller lenders, reliant on the RMBS market, have been unable to match.” While Resimac and AFG are funded through the securitisation market and get some pricing benefit from public market transactions, other non-ADI lenders have to deal with more expensive funding arrangements. In October last year Nano suspended new lending because of “soaring funding costs” and then last month withdrew from the mortgage market permanently.