By Byron Kaye and Lewis Jackson

SYDNEY Australia's Westpac Banking Corp said it will refinance loans for some borrowers who don't meet an industry standard that assesses their ability to repay, putting pressure on the bank regulator to relax guidelines after a year of interest rate hikes.

The country's No. 2 mortgage provider has told mortgage brokers that "if a customer is unable to meet serviceability under the standard assessment criteria", it might apply a modified serviceability assessment rate.

It did not specify what the modified rate would be.

The Australian Prudential Regulation Authority (APRA) advises banks to extend loans to customers only if the bank believes they can repay at three percentage points higher than current market rates.

Australia's "Big Four" banks have publicly called on APRA to ease the rule. They argue that after a year in which the central bank has raised rates every month but one, some people who took out a loan before then are now unable to refinance because they would fail the 3% serviceability test.

APRA was not immediately available for comment. It said in February that it plans to keep the 3.0% buffer in place despite the changes in economic conditions.

Since the buffer is a guideline, banks are allowed to deviate from it.

"The current buffer of three percentage points helps ensure new borrowers don't take out excessive debts compared to their incomes, however the test is locking some existing borrowers into mortgage prison," rates comparison website RateCity said in a statement.

"APRA should consider officially lowering the serviceability buffer for refinancers."

National Australia Bank Ltd declined to comment. Representatives for Commonwealth Bank of Australia and ANZ Banking Group Ltd were not immediately available for comment.

($1 = 1.4743 Australian dollars)

(Reporting by Byron Kaye and Lewis Jackson; Editing by Edwina Gibbs)