Major Australian banks' over reliance on international funding for their mortgage services leads to rising borrowing costs, which in turn push up interest rates being slapped on bank consumers, according to a credit rating agency's report.

Fitch Rating said on Wednesday that as Aussie banks continue to depend on offshore source to fund their borrowing services, their vulnerability also rises since the interest rates face by banks for repayments are influenced by market rates and wholly independent from the rate policies issues by the Reserve Bank of Australia (RBA).

And this credit cost has ballooned since the global financial crisis, according to Fitch Ratings senior director John Miles, which banks are likely to pass on borrowers by increasing their loans' interest rates.

Miles said that too much demand coming from Australian banks for international funding drives up the quota set by foreign wholesale lenders for the country and "when that happens it's a simply a function of supply and demand and that can potentially push up the cost of funding."

At present, Fitch Ratings said that the country's big four banks, namely the ANZ Banking Group, the Commonwealth Bank of Australia, the National Australia Bank and Westpac, have imposed interest rates on their borrowers that are beyond the rates announced by the RBA.

Miles said that this could be attributed to imminent needs by the big four to acquire loans that run to $100 billion this year in order to fund existing and new loans, aside from the need to roll over loans previously backed by the government and was contracted at the height of the worldwide financial downturn.

Such scenarios only further shoot up the financing costs of Australian banks but recovering those costs may be hard to come by this year as consumer loans are expected to drop in 2011 and lead to soft returns for the country's giant banks.

Fitch Ratings is even projecting that bank earnings for the current year are likely to drop as consumers shy away from availing of mortgage loans.

However, mortgage defaults expected to arise due to the recent flooding disaster would only lead to modest losses, according to Miles, who argued that "there are a chain of events that need to occur before a loss will actually crystallise on a home loan."