During the sixties, seventies, and early eighties, local authorities were a major lender of home loans. After this, their popularity waned as a result of the competition from banks and building societies, who offered attractively priced mortgages. Local authority mortgages were gradually phased out by the Government, as they believed that the banks offered adequate mortgage provision.
However, due to the current recession and the banks’ stricter lending criteria regarding mortgage lending, many organisations (such as the New Local Government Network) believe that local authority mortgages could be the answer to the mortgage and remortgage problems commonly experienced by first-time buyers and those with little equity who are looking to remortgage.
Chris Leslie, director of the New Local Government Network says:
“Despite attempts to reboot the banking system at a national and international level, mortgage finance is not yet trickling through to the grassroots in ways able to help those needing to urgently remortgage, facing negative equity or first time buyers.
We still feel that the public sector should supplement the mainstream banks in providing modest but helpful lines of mortgage credit – on a secured and prudent basis, of course – to ensure that we have a mixed economy of provision not entirely reliant on a nervous private banking sector.
Local authority lending may well have a part to play here and we are seeing gradual interest across councils in perhaps thinking about this role more seriously”.
At present, the majority of banks only offer mortgages with a maximum LTV of 80%, meaning that many first time buyers simply cannot afford the 20% deposit and thus cannot get onto the property ladder. Local authority mortgages offered loans covering 97% of the property price, and thus if they were reintroduced it would provide a lifeline to those who are currently priced out of the property market.
Just like a conventional mortgage, local authority mortgages run for 25 or 30 years, but tend to lend to local people and in areas of high regeneration. It has emerged that the housing minister, Margaret Beckett, is seriously considering reintroducing the local authority mortgage scheme in order to open the housing market to those currently excluded.
One problem with the local authority mortgages was that councils were previously prevented from lending below the standard national rate of 5.07%, but last month this rate was slashed to 3.93%, meaning more affordable mortgages in view of the current economic climate.
If this mortgage scheme gets the go-ahead from the Government, local authorities in cities and towns such as Manchester, Portsmouth, and Bristol will shortly be offering mortgage services to those first time buyers and remortgagors unable to access the mainstream mortgage market. This needs to be sooner rather than later, as the credit crunch and subsequent recession has all but ground the housing market to a halt and this could be just the thing to get it moving again.
In the days when local authorities did offer mortgages, the scheme was proven to be valuable; at one point, they held 16% of the mortgage market. As Chris Leslie, director of the New Local Government has said, a diversity of mortgage provision is needed to prevent, or rather resolve, the current crisis.
It is not known when the local authority mortgages will come into force, but Gordon Brown, in a speech at the New Local Government Network annual conference in January, told how he believed that councils should be given greater opportunities to play a bigger role in housing.
This indicates that local authorities will be given greater powers in the near future – for those unable to get onto the housing ladder, the local authority mortgage cannot come soon enough.