Westpac chief executive Brian Hartzer says about 50 per cent of the bank's mortgages are still interest-only.
Prudential regulator APRA told the major banks six months ago to limit higher risk interest-only loans to 30 per cent of new residential mortgages, but Mr Hartzer said Westpac is comfortable with a much higher overall rate with older loans included.
Mr Hartzer told MPs in Canberra on Wednesday that offset accounts and additional payments meant many interest-only borrowers were still reducing their level of debt.
"The amortisation of interest only accounts is roughly similar to people who structure their loans as principal and interest," Mr Hartzer said.
The Australian Prudential Regulatory Authority acted on interest-only loans in March against a backdrop of high housing prices, high and rising household debt, subdued household income growth, and historically low interest rates.
Westpac and its major rivals have since hiked interest-only rates to make loans less attractive in comparison to principal and interest loans.
The move also increased the amount of capital the lenders generate.
"We have two objectives: one is to meet the APRA requirements; the other is make sure the shape of our book is resilient and our customers are heading in the right direction," Mr Hartzer said.
Asked by Liberal MP David Coleman what he would say to borrowers who found their loans becoming more expensive despite not being the target of the APRA limit, Mr Hartzer was succinct.
"Move to principal and interest: it's cheaper," he said.
Mr Coleman, the chairman of the standing committee on economics, asked Mr Hartzer what Westpac was doing to address attempted money laundering given the allegations facing rival Commonwealth Bank.
CBA is facing Federal Court action over allegations it breached anti-money laundering laws through its intelligent deposit machines.
Mr Hartzer said Westpac had set a $4,000 limit on automated deposits, compared to $10,000 at CBA, and closely analysed deposit patterns for suspicious activity.
"It's a real scourge on society and a challenge for the whole economy," Mr Hartzer said.