Australia’s banks and other smaller lenders could see their funding costs rise with one ratings agency, Standard and Poor’s, placing ratings of 25 lenders on negative watch.

The agency says it is concerned about rising household debt and booming property values.

The lenders include Macquarie Group Ltd (ASX: MQG), AMP Limited (ASX: AMP), Bank of Queensland Limited (ASX: BOQ), Bendigo and Adelaide Bank Ltd (ASX: BEN) as well as MyState Limited (ASX: MYS), IMB, Cuscal and CUA.

Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) had their credit ratings placed on negative watch in July, after S&P placed Australia’s AAA sovereign rating on negative outlook.

S&P says its view of the banks hasn’t changed.

A negative watch means there is a one-in-three chance that S&P could lower these ratings in the next two years. As S&P says, “Household debt has risen to 139% of GDP in June 2016 from 118% in 2012, coupled with an increase in property prices nationally (around 5.3% adjusted for inflation) are driving the potential increase in imbalances in the economy, in our view.”

“Consequently, we believe the risks of a sharp correction in property prices could increase and if that were to occur, credit losses incurred by all financial institutions operating in Australia are likely to be significantly greater; with about two-thirds of banks’ lending assets secured by residential home loans–the impact of such a scenario on financial institutions would be amplified by the Australian economy’s external weaknesses, in particular its persistent current account deficits and high level of external debt.”

Moody’s identified five major headwinds Australia’s big four banks were facing in July this year, including rising property prices.

The problem for lenders is that a lower credit rating usually means higher interest rates on their borrowings – and those could be passed onto Australian borrowers.

3 Rotten Shares to Sell, and 1 to Buy Today

After a double-digit rally for the ASX since 2016 lows, investors should be on high alert. You'll find a full rundown below of 3 shares we think you should avoid today plus one top pick worth buying, even if the market turns south and the RBA keeps rates at an "emergency low." Simply click here to uncover these stocks.

HOT OFF THE PRESSES: Motley Fool’s #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is enter your email below!

Simply enter your email now to receive your copy of our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2017.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.