Bank on a big change
Housing revenue account reform means for the first time councils can decide how much to borrow, but they must be on the ball if they are to get the best deal, says Rachel Terry
Because of the way the housing revenue account subsidy system works, council tenants have not needed to know about the housing debt of their local authority landlord. Whatever loans the director of finance arranges, the effect on the HRA is the same. But from 1 April, the situation will be very different. With self-financing, the interest rate risk will pass from the Communities and Local Government department to the local authority. Good treasury management will be very important for the financial well-being of the HRA.
Self-financing of the HRA relies on a business plan with debt that can be serviced over 30 years. The recent debt figures announced by the CLG for each council with an HRA are based on an interest rate considerably higher than those at which the authority can borrow today.
This is good news for tenants’ rents as a 0.25 per cent saving in interest costs on a loan of £10 million reduces the income required by £25,000 each year.
A double whammy
For most authorities, the HRA will have two different batches of loans: the existing housing debt and new debt to be raised by 28 March to buy out of HRA subsidy. Relatively few authorities will have their existing housing debt reduced.
Additional borrowing will be curtailed by a debt cap imposed by the Treasury on housing loans for each authority. This will mean that many authorities will not be able to borrow as much as the HRA could afford to borrow. This is particularly worrying for those authorities that will need some additional borrowing to replace right to buy sales with new properties on a one-to-one basis.
Local authorities can borrow from the Public Works Loan Board or from the market. Since October 2010, when the cost of PWLB loans was increased by the Treasury, the costs for large loans are broadly similar from both sources. In September 2011, the Treasury helpfully agreed that the interest rates on new loans from the PWLB for self-financing would be one percentage point cheaper than the standard rates. In November it was announced that this reduced rate is to be available on one day only - for applications received on 26 March 2012.
To plan for that day, the director of finance will have to consider what loans to borrow. There is a choice of period from one to 50 years for fixed-rate loans and up to 10 years for variable rate loans with one, three or six monthly interest payments. Any loan can have a bullet payment (a lump sum payment for the entire loan) on maturity or equal instalments of principal, and fixed-rate loans can also be on an annuity basis (like a building society mortgage). If authorities expect their HRA debt to stay the same or be increased in the future, rather than reduced, they may decide it would be attractive to borrow at a fixed rate for 50 years, if interest rates at the end of March are close to an all-time low.
Playing the odds
It is possible to take a large number of separate loans on the same day. If interest rates move up, the director of finance may choose to take some variable rate loans in anticipation of refinancing at a lower fixed rate in the future than is available at the end of March.
To ensure a smooth lending process at the end of March, the PWLB has developed a dedicated website for self-financing loans. Although it normally handles transactions by telephone, loans for self-financing will be arranged using that website.
For several authorities, this borrowing and debt payment to the CLG on 28 March will be above their normal transaction size at their bank branch.
It will be essential for the bank to be briefed in advance and necessary authorisation obtained, so that the loan cash is received in time for the payment to be made to the CLG on the same day.
As existing housing loans mature, these will be refinanced. If the replacement loans have a lower interest rate, that will help cashflow in the HRA. With such savings in interest payments, there may well be scope to borrow more for improvements or new houses. It is because this is likely to be pursued across the country, that the Treasury has imposed the cap on the HRA loan debt that each authority can borrow.
The challenge for councils is to persuade the government to change its accounting rules in line with those of other European countries so that the cap on their housing loans can be lifted (Inside Housing, 27 January).
Rachel Terry is deputy chair of the Public Works Loan Board