Westpac has approved mortgages that borrowers are unable to afford because the bank failed to properly factor in home loan customers' actual living expenses, the corporate regulator alleges.

The Australian Securities and Investments Commission on Wednesday launched civil action in the Federal Court, alleging the country's second-largest mortgage lender breached responsible lending practices.

Westpac is readying to get rid off its shareholding in BTIM. Credit:Carla Gottgens

In the first action of its kind, ASIC claims the bank failed to properly assess whether its customers could make minimum repayments on home loans approved between December 2011 and March 2015.

Westpac allegedly used a statistical benchmark to assess loan repayments instead of the actual expenses declared by prospective borrowers and approved loans where a proper assessment would have shown a monthly deficit.