Council leaders were pleased this week when the government effectively gave the green light for local authority mortgages by cutting the minimum interest rate that the councils must charge on a mortgage.

The Department for Communities and Local Government cut the minimum interest rate from 5.07 per cent to 3.93 per cent on Monday, which means the local authorities can compete with the mortgages offered by banks and building societies.

From the 1960’s through to the 1980’s council mortgages used to be a popular way of securing a home loan, or mortgage, but in 1985 new legislation meant the councils could only lend at a set national interest rate which was designed to prohibit their use.

Chris Leslie, of the New Local Government Network, a left-wing think tank, said: “Historically councils were a major force in the mortgage market but Margaret Thatcher believed it was a job for the private sector. It is clear that there has been a thawing of the idea in the Government that the housing market needs mortgage liquidity from any source willing to offer it.”

The current economic climate means that increased competition is welcomed and several local authorities such as areas of Birmingham and London have expressed an interest in offering mortgages.

Mortgage advisors and those taking their CeMAP training to offer mortgage advice in Birmingham, London or other areas where council mortgages may be offered will need to keep up to date on what is available but are unlikely to see hordes of borrowers heading to councils for their mortgages.

Bernard Clarke, of the CML said: “I’m not sure that local authorities would have the capacity to full the funding gap which exists in the mortgage market. It is difficult for local authorities to run fully fledged mortgage businesses and their efforts could be better directed at problem of rising repossessions and homelessness.”

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