The Gillard Government wants to ban the charges on new standard variable home loans from July 2011.

The Mortgage and Finance Association of Australia, the peak body for non-bank lenders and home loan brokers, says the policy would hurt smaller players who command just three per cent of the market.

"They would have to put up their interest rates,'' chief executive Phil Naylor told a Senate inquiry hearing in Sydney.

"But if they put up their interest rates, they're no different to the rest of the lenders in the market.

"Why would there be any attraction for borrowers to go to those lenders if they are charging the same interest rates as the banks?''

Non-bank lenders charge some of the lowest interest rates in the mortgage market but they demand a higher exit fee than the big banks if a customer wishes to leave.

One Victorian lender charges a $7300 fee if a borrower wants to leave an average $300,000 mortgage within the first three years.

By comparison, the Commonwealth Bank charges $700 while Westpac demands $900.

ANZ and National Australia Bank have abolished exit fees.

Mr Naylor said non-bank lenders charged higher exit fees because they needed certainty from customers, in a similar way mobile phone companies used contracts to keep consumers locked in.

He rejected a suggestion from Treasurer Wayne Swan, made on Sunday, that smaller lenders were relying on an unsustainable business model based on higher exit fees.

"You're assuming that they're relying on the payment of the fee to keep them going - that's not sustainable - but they don't,'' Mr Naylor said.

"I don't know that too many non-bank lenders actually collect the exit fee, or the debt payment.

"They don't build their model on the fact that everyone's going to leave in the first three years and therefore they're going to get $7000 per customer, that would be dumb.''

Earlier, consumer group Choice said Mr Swan has done a reasonable job with banking reforms but more is needed to improve competition.

Choice CEO Nicholas Stace appeared before the Senate banking inquiry today and defended the treasurer from a lampooning in a Sydney newspaper.

The Sydney Morning Herald was "slightly unfair'' in depicting Mr Swan as belting the big banks over the head with a feather-duster.

"But I hope the feather-duster analogy gives the treasurer a sense he needs to go further,'' Mr Stace told a Sydney hearing of the inquiry into banking competition.

He marked the treasurer's efforts as a seven or eight out of 10.

"In terms of what the package looks like so far, I think it's probably closer to five,'' he said.

Choice wants the barriers brought down to allow entrepreneurs into a market that is presently dominated by the four big banks and two major credit card providers.

Shares in the big four banks added $3.4 billion to their value yesterday in response to the government's reforms, while the share price of smaller banks declined.

"Until the government announced its reform package, I think the banks were quite nervous about what was going to be announced,'' Mr Stace said, adding they had feared substantial legislation forcing them to do things that they weren't ready to do.

"I think there was probably a bit of relief on Sunday night when the actual the reform package, as it stands at the moment, isn't going to change the world for those banks.

"It is an important first step, but the government must keep the pressure up, there should be other phases to this reform process.''

Mr Swan's package included ending mortgage exit fees from July 1  2011, giving greater power to smaller financial institutions, while investing a further $4 billion in the residential mortgage-backed securities market.

Australian Securitisation Forum CEO Chris Dalton told the hearing he hoped the latest investment, which will bring total government support in the market to $20 billion, would open the market to more players.

He described as "a tranche of survival'' the first $8 billion investment during the depths of the global financial crisis. The second $8 billion encouraged investment.

"International investors are aware of the government's support and involvement, and see that as a positive,'' Mr Dalton said.

London-based investment bankers noted the Australian government's action was in stark contrast to the support of its UK counterpart.

The Finance Sector Union wants laws put in place that places the interests of customers first.

"Not hitting a sales target, not making more money out of that person,'' the union's national secretary Leon Carter told the hearing.

"If we do that, we think we will end up with a strong sustainable, responsible industry, that not only looks after shareholders and customers, but also values its workers.''