Banks which charge unfair mortgage exit fees face a crackdown from the Australian Securities and Investments Commission (ASIC).
From July 1, ASIC will also have the power to go after institutions which seek to rebadge current exit fees as upfront entry fees.
Treasurer Wayne Swan and Financial Services Minister Chris Bowen said these new powers would make it easier for borrowers to switch to a competitor offering a cheaper rate, providing a major boost for competition in the mortgage market.
"Currently, some banks are using mortgage exit fees to lock customers into their home loans," Mr Swan and Mr Bowen said in a statement on Sunday.
"Exit fees can be so high that there is no incentive to switch to another lender, even if they are offering a substantially lower interest rate.
"The Government is determined to make the banking system work for families, not against them, and these tough new powers are a major step to delivering on that commitment."
From July 1, ASIC will have the power to take action against any bank for charging an early exit fee considered unfair or unconscionable.
Consumers will also be able to challenge early exit fees that are unfair or unconscionable.
Mr Swan and Mr Bowen said ASIC was most likely to take action against banks trying to profit from exit fees or establishment fees rather than fees which merely recover a fair level of costs.
Any mortgage exit fee found by a court to be unfair will be declared void, with ASIC able to seek refunds for customers.
ASIC released guidance on Sunday on how it proposes to tackle unfair terms.
Following consultation with the industry, ASIC will now develop a specific framework on regulation of early mortgage exit fees.
"The global financial crisis has created some significant challenges for competition in the mortgage market," they said.
"These can't be solved overnight but the Gillard government is determined to take action wherever possible to boost competition and improve protections for Australian families."
Australian Bankers Association (ABA) chief executive Steven Munchenberg said Australia had the lowest entry fees for mortgages compared to the United States and United Kingdom.
"That means it is cheaper to get a mortgage here than in other countries," Mr Munchenberg said in a statement on Sunday.
"Banks achieve this by deferring some of the costs of establishing a mortgage and only charging those customers that change their mortgages in the first few years."
Early mortgage exit fees included the banks unrecouped costs associated with the establishment of the loan, Mr Munchenberg said.
"Exit fees may also include the credit providers average administrative costs and any loss to the credit provider arising from the early termination.
"For example, a credit provider may agree not to charge the full loan establishment costs at the start of the loan on the basis that it may recoup those costs if the loan runs beyond a certain term."
Deferring up-front fees such as legal service fees reduced the cost to customers of setting up new loans, the ABA said.
It was important lenders were consulted by ASIC, Mr Munchenberg said.
National Australia Bank (NAB) said it welcomed the tougher new laws.
It said it would be good for bank customers, increasing competition and giving customers a fairer deal and the ability to access better rates.
NAB Group chief executive Cameron Clyne said while the full details of the new laws had not been reviewed by the bank, it was generally supportive of the measures.
"If these new laws banning unfair mortgage exit fees encourage greater competition and give Australians more power to walk down the road and find a better deal for their mortgage then that's a great thing for all Australians," Mr Clyne said.
