The weak housing market in Australia and the pressure on the east coast economy has resulted in home loan customers taking longer than expected to pay off their mortgages. This has added to the pressure being felt by Australian banks which have to pay more for longer-term funding.

When the economy was performing better, many mortgage holders paid down their home loans in five to eight years instead of the usual 25 to 30 years terms of the loan. A number of them sell their properties midway through the loan and pay off the remaining balance in bulk. Some pay more than the minimum mortgage rate which speeds up the banks' sell-down rates.

However, the weak property market caused more owners to stay longer in their existing properties. Instead of adding to their mortgage payments, many home loan borrowers are using the money for shorter-term savings.

Bank accounting rules consider loans made to clients as assets. A bank executive said that because of this development, banks' asset profiles are becoming longer.

In recent weeks, Commonwealth Bank and Westpac paid a premium to local investors for a combined $6.6 billion secure bonds with maturity of five years. In January also, ANZ Bank raised $1.2 billion in 10-year bonds from European investors. The bonds are considered the most expensive raising so far for 2012. In the next few weeks, ANZ plan to sell four-year bonds to Japanese investors.

The recent bond issues of CBA and Westpac set an expensive standard and placed more pressures on bank margins, UBS chief economist Scott Haslem said. It also makes it more difficult for smaller Australian banks to lend profitably particularly with another Reserve Bank of Australia (RBA) interest rate cut looming when the Australian central bank's monetary committee meets next week.

A bank executive added that most lenders are not in favour of short funding terms which explain why the banks are willing to pay high interest rates. However, the banks are unsure if the higher cost of funding could be passed on to borrowers given the pressure on lenders to pass in full any overnight cash rate cuts made by the RBA.

Global concerns over the European sovereign debt crisis have caused price of funding to increase. With deposits now making up only half of their funding, the lenders have to use both long short-term and long-term wholesale funding to make up the remaining 50 per cent.

Analysts estimate that Australian banks need to borrow up to $80 billion over the next 12 months to replace maturing funds the bulk of which would be covered bonds that are secured by assets such as home loans.

In 2012 alone, the big four would need to refinance $26.07 billion as the government-guaranteed three-year debt taken in 2009 starts to mature. In 2013, another $6.7 billion must be rolled over which would escalate to $32.7 billion in 2014 as five-year debts mature.

Experts said that banks' funding costs are expected to jump due to the ongoing volatility in the global financial markets. As a result, major retail banks in Australia are expected not to pass in full any key lending rate cuts the RBA is anticipated to make in 2012.

Instead of the 25 basis points, the banks would likely pass on only 15 basis points.

The government-guaranteed debt taken by Aussies banks in 2009 were priced about 100 basis points above the swap rates. Minus the guarantee, the banks' cost would go up to about 200 basis points above the swap rates, an analysis by National Australia Bank (NAB) showed.

The recent covered bond transactions by Commonwealth and Westpac were 175 and 165 basis points higher than the overnight cash rate.

"It's going to be the maturities and not credit growth that will dictate the issuance of covered bonds and long-term debt this year.... The elevated funding costs, substantial regulatory changes and a low credit growth environment all point to a challenging year ahead for the big four," NAB senior fixed-income analyst Ken Hanton told The Australian.

The Australian banks' profitability problem may even be worsened with the entry of more competition from three large Japanese banks that may offer lower interest rates to home loan borrowers. Reports said that the planned entry of the Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Group was eat up to 5 to 10 per cent of the home loan market in Australia.

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