First-time buyers could be offered cheaper mortgages if they take out an insurance policy, under new plans to help get people with small deposits on the housing ladder faster.
The insurance policy would protect banks if they defaulted and would therefore allow them to offer the buyer lower mortgage rates.
Michael Gove, the housing secretary, is examining the Canada-style plans to make loans more available for those without big savings,.
He raised concerns that restrictive mortgage financing is shutting a generation out of owning their own homes.
Gove said that by looking at how other countries have allowed more families to get loans with small deposits, he will "fix our dysfunctional housing market".
Banks are less likely to lend to people with small deposits because they are considered risky and are more at risk of defaulting.
Gove said that "we need to make access to finance for ownership easier" for young people, pointing out that just a quarter of those aged 25 to 34 on average incomes own their own home, down from two thirds in 1995.
"Getting more young people on the housing ladder depends, firstly, on improving their ability to get mortgages. Many people currently renting pay more to their landlord each month than they would need to pay to service a mortgage on the same property," he wrote in The Mail on Sunday.
"We are looking closely at what more can now be done to help," Gove said, adding: "Other countries facing similar problems make access to mortgage finance easier and so can we."
Canada buyers borrowing more than 80 per cent of the value of their home are required to take out mortgage guarantee insurance.
This is offered by their state-run Canada Mortgage Housing Corporation as well as two private providers.
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State-backed mortgages mean banks have less need to ask for large deposits, and bring down monthly costs.
In Canada, monthly payments on a 95 per cent loan-to-value mortgage are 32 per cent higher than on a 75 per cent loan-to-value mortgage, compared with 52 per cent higher in the UK, according to a study by the Tony Blair Institute.
Ian Mulheirn, chief economist at the Tony Blair Institute, said that banks' demands for bigger deposits than in the past was "the most important constraint on home ownership" and has driven up mortgage costs for first-time buyers so that rates are a percentage point or two higher than for those with bigger deposits.
"If you have compulsory reliable insurance in theory it should eliminate most of that difference," said Mulheirn.
Mulheirn said making it compulsory resulted in cheaper rates as it "prevents the product only being used by risky lenders or lenders at risky moments in the economic cycle, both of which push up the fees".
