Borrowers aged 18 to 30 will be eligible to take out loans of up to £1,500 or £2,000 in London provided they are in paid employment and are not homeowners.
The cost of borrowing will be pegged to the cost of government borrowing, which currently stands at 2.5%.
The party said it will fight for the policy if it forms part of another coalition government, however it doesn’t anticipate major opposition from other parties, claiming Help to Rent will be inexpensive.
Nick Clegg, deputy prime minister and leader of the Liberal Democrats, said: "Increasingly we see young people stuck in the family home as they can't afford the upfront costs of a deposit to rent a property despite having a paid job.
"It's simply unfair that thousands of hard-working young people still have to live in the same bedroom they lived in when children.
"When you get your own job, you want to stand on your own two feet, have your own space, and not have to rely on the bank of mum and dad.
"Our Help to Rent scheme removes this barrier to young people's independence, providing access to up to £2,000 towards their tenancy deposit so they can fly the nest and rent their own space."
Loans can be paid over one or two years while once paid off they can be used for future rental properties.
The British Property Federation, a trade association for property ownership and investment, backed the Lib Dem’s proposal.
Its director of policy Ian Fletcher said: “Young renters often do not have a credit history and therefore struggle to raise a deposit. This welcome policy will help more people into their first homes and stop them having to raise funds through pay-day lenders and other risky means.
“Today’s announcement builds on the excellent work of the CBI and Shelter, who have encouraged employers to voluntarily offer loans for tenancy deposits, much like loans already offered for travel season tickets.
"Schemes such as these are also made possible by the vast majority of legitimate landlords and agents, who lower the lending risks to the state by signing up to one of three government-sourced deposit-protection schemes."
