SafeStart mortgages would be offered with no fees and at 85% LTV. Based on a rate of around 4.5%, the LTV would fall to 75% after five years provided borrowers kept up repayments.
The Lib Dems have dubbed it “an Aldi mortgage rather than a Waitrose one”.
Funding would be provided in the form of guarantees, which the Lib Dems say would come from insurers or possibly the government.
Insurers would offer guarantees against the depth of house price falls, rather than the asset quality of each mortgage.
Lord Oakeshott, Treasury spokesman for the Lib Dems, 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.”
The plans have been broadly welcomed by the industry for attemp-ting to tackle the dearth of mortgage lending, but issues over funding remain unanswered.
Peter Williams, executive director of the Intermediary Mortgage Lenders Association, says: “The idea of a relatively standardised mortgage that has got characteristics which are considered safe is a good thing.
“It wasn’t clear from the details I’ve seen about who was going to provide the funding for this. That said, it is the first party offering a view on a possible way out for the mortgage market.”
Nationwide says it is broadly supportive of what the Lib Dems are proposing.
But a spokeswoman for the lender adds: “Without having full details it is difficult to assess how viable the proposals may be. They suggest they would require the backing of either insurers or the government to prove workable.”
Lloyds Banking Group says it is also awaiting further details but already has a five-year fixed rate deal at 90% that is fees-free. The Council of Mortgage Lenders says the Lib Dem idea is too restrictive and won’t promote competition among lenders.
A CML spokeswoman says: “I don’t think we want to be this prescriptive about mortgage products.
“What’s more important is a return to conditions where there is an adequate supply of funding to a mortgage market which offers a range of products, so all creditworthy borrowers have access to a mortgage that suits their individual needs.”