Customers taking out a new home loan would be able to borrow tens of thousands of dollars more, under a proposal from the banking regulator to unwind a key constraint that was put on lenders during the property boom.

In a move that was welcomed by the property sector and lenders, the Australian Prudential Regulation Authority (APRA) on Tuesday proposed scrapping a rule that has meant all new mortgage customers are assessed on their ability to manage repayments with 7.25 per cent interest rates.

The move is likely to increase the maximum amount a new customer can borrow. Credit:Louise Kennerley

The loosening of one of APRA's key constraints on mortgage credit helped bank shares to another strong day after a bumper performance on Monday. Westpac, ANZ Bank, and Commonwealth Bank shares each rose by more than 2 per cent, while National Australia Bank shares rose 1.5 per cent.

The interest rate "floor" was introduced in late 2014 in an attempt to contain soaring house prices and surging housing investor loan growth. It has required banks to test prospective borrowers against the higher of either an interest rate of 7 per cent, or a 2 per cent "buffer" over the loan's actual interest rate.