Dubbed the SafeStart Mortgage, the product would initially be offered to borrowers at 85% LTV.
Based on a rate of 4.5%, the Lib Dems predict that if borrowers kept up repayments the LTV would fall to 75% over a five-year term.
The party argues that there is no place in the current market for mortgages of 100% LTV or more, given the threat of negative equity over the next few years.
SafeStart Mortgages would aim to bridge the funding gap by offering guarantees alongside the mortgages, similar to Sir James Crosby’s proposal to guarantee mortgage-backed securities.
Guarantees could be provided by the government, but the Lib Dems say the guarantees would more likely come from insurers.
Insurers would guarantee against the depth of house price falls, rather than the asset quality of each mortgage.
Lord Oakeshott, Treasury Spokesman for the Liberal Democrats, says: “We are trying to design a sensible, safe mortgage which will be the default option that every lender should offer.
“If we are going to be giving government guarantees it should be for mortgages that are safe and solid, rather than writing a blank cheque for all mortgage products.”