The party said extra support is particularly needed for first-time buyers who have “scrimped and saved to get on the housing ladder”.
It said last week’s forecast from the Office for Budget Responsibility showed that household debt servicing costs – the interest people pay on their loans including mortgages and credit cards – are set to increase from £55 billion in 2021/22 to £83 billion in 2023/24.
That equates to increased interest payments of £1,000 per household over the two years, based on 27.8 million households in the UK, the Lib Dems said.
Leader Sir Ed Davey criticised the Chancellor Rishi Sunak for pushing ahead with a planned tax hike while “people’s homes are on the line”.
“Many first-time buyers who have scrimped and saved to get on the housing ladder will urgently need a safety net to get through what looks like months of mortgage cost rises,” he said.
“We need an emergency mortgage support fund to support struggling families, or we will see people forced to default and hand back the keys to their homes.”
Homeowners receiving certain benefits can currently secure loans to help cover mortgage interest payments through the Government’s Support for Mortgage Interest (SMI) scheme.
People can access these loans either from the date they start getting Pension Credit; after they have claimed income support, income-based jobseeker’s allowance or income-based employment and support allowance for 39 weeks in a row; or after they have received universal credit for nine consecutive months.
But the Lib Dems believe the 39-week waiting period for some “could be too long for families in a cost-of-living crisis”.
The party’s proposed emergency mortgage support fund would offer payments instead of loans.
Waiting times would also be reduced from 39 to 13 weeks, the Lib Dems said.
A Government spokesperson said: “We understand that people are struggling with the rising cost of living – we can’t shield everyone from these global challenges but are taking action worth over £22 billion this financial year to help.
“We’re increasing national insurance thresholds and cutting the Universal Credit taper rate to help people keep more of what they earn, increasing the national living wage, and providing a £9 billion package of support with energy bills – and we continue to provide loans for those on low incomes to help pay their mortgage interest.
“We are also investing over £12 billion in affordable housing to help young people and families onto the property ladder and our new First Homes scheme will provide homes at a discount of at least 30% for first-time buyers.”