Trowers & Hamlins

Local Authorities who want to start providing mortgages will need to ensure that they are offered at the right interest rate or risk being found to be acting 'ultra vires' (beyond their powers), warns Trowers & Hamlins the (City/Manchester) law firm.

In the recent New Local Government Network Report, it is recommended that Local Authorities use their borrowing powers to start offering mortgages to those potential home-owners who have been locked out of the commercial mortgage market by the 'credit crunch'. Following on from this, Liverpool City Council has just announced that it is to launch a feasibility study to review whether it can start offering mortgages.

Explains Suzanne Benson of Trowers & Hamlins "Where Local Authorities want to provide mortgages directly to individuals they can not charge less than a minimum set interest rate. This is determined as the higher of either the average interest rate in that area or the national interest rate for mortgages."

Trowers & Hamlins explain that the current national interest rate, which is set by the Secretary of State for Communities and Local Government, is currently 6.89%. However, Trowers & Hamlins say that this rate was last set in February 2007 and, therefore, could be changed before any local authority mortgage plan gets up and running.

Trowers & Hamlins says that Local Authorities have historically provided mortgages but that most stopped in the late 1980s and early 1990s. More recently Trowers & Hamlins have advised some Local Authorities on the provision of mortgages where they have been part of urban regeneration, home improvement and relocation schemes.

Says Suzanne Benson "It is not an activity that is completely new to Local Authorities but  mortgage lending to the wider market would bring Local Authorities onto new territory."

Trowers & Hamlins also point out that as an alternative to actually providing mortgages themselves Local Authorities have the power to indemnify a commercial lender that would apply if a borrower defaulted.

Adds Suzanne Benson "This power could provide a useful tool in reducing the risks to lenders in providing mortgages to persons qualifying for low cost home ownership as they would potentially be able to rely on the strength of the Local Authority’s covenant."

"Undertaken properly this solution could involve far lower administrative costs."

Trowers & Hamlins also suggest that Local Authorities could provide more mortgage lending by investing in a separate body such as a local housing company, who would then provide the lending facility.