UPDATE 1-Two Australian banks not to pass on full rate cut

(Adds comment, details)

SYDNEY, April 7 (Reuters) - National Australia Bank (NAB.AX) (NAB) and Commonwealth Bank of Australia (CBA.AX) (CBA) cited higher funding costs on Tuesday as a reason for not cutting mortgage rates in line with a cut by the central bank.

No.3 lender CBA said it would cut its standard variable mortgage rates by 0.1 percent and NAB chose not to cut, after the Reserve Bank of Australia cut the official cash rate by 0.25 percent to a record low 3.0 percent.

Australian banks have come under strong pressure to pass on rate cuts in full from a government wrestling with a sharp economic slowdown and the spectre of rising unemployment.

Earlier this week the government said the country's top four banks had agreed to up to 12-month deferrals in repayments, extensions of mortgages and interest-only repayment options for people who lose their jobs, as part of efforts to cushion the economy.

"The cost of wholesale funding remains extremely high and as old funding matures and is replaced at much higher rates our average cost of funding continues to rise," said Ross McEwan, group executive of retail banking services at CBA.

Australian banks have not been hit as hard by the credit crisis as many of their European and U.S. peers, but are feeling the effects of a slowing economy at home, as bad debts, funding costs and unemployment rise.

"Whilst customer interest rates have been falling, the actual cost of banks providing a mortgage has increased significantly since the credit crisis hit in mid-2007. Our pricing needs to responsibly reflect these increased funding costs," NAB said in a statement.

For more on the central bank's decision, see [ID:nSYD452265].

CBA's new rates will be effective from 17 April 2009 for new and existing customers, the bank said in a statement.

Westpac Banking Corp. (WBC.AX), Australia's second-largest bank, and No.4 lender Australia and New Zealand Banking Group (ANZ.AX), had yet to decide on whether to pass on any of the rate cut. (Reporting by Mette Fraende)