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Local authorities in Manchester, Bristol, Portsmouth, Lambeth and Hackney are among councils that could soon be offering mortgages to help struggling home buyers onto the property ladder, when the government today reduces a rate at which they are able to lend money.
Council leaders at the authorities have been arguing that they should be able to provide greater access to financial services since the credit crunch forced lenders to reduce their range of home loans.
A decision by the Communities and Local Government department to cut the "standard national rate" at which councils are able to lend may pave the way for authorities to begin to plug the gap left by building societies and specialist lenders that have stopped lending. The standard national rate will be reduced from 5.07% to 3.93% from today.
Officials have been exploring schemes to help buyers shut out of the market after banks and building societies stopped offering loans above 90% of a home's value.
Local authorities played a major role in the home loan market in the 1960s, mid-1970s and also the early 1980s until mortgage finance became more widely available and their loans became less attractive. At one point, they had 16% of the mortgage market. During the 1970s, they typically offered loans of up to 97% of the value of a home, with repayments spread over 25 or 30 years. Mortgages were granted to local people only and targeted areas councils were keen to see regenerated.
"Councils used to be in the mortgage business until the 1980s when this facility was wound down by the government, as it was then assumed that the private banks could cope. We now know that a diversity of mortgage provision is needed to prevent the current crisis," said Chris Leslie, director of independent thinktank New Local Government Network, which has been lobbying for changes to the current regime.
The reduction in the standard national rate is regarded as essential to entice councils back into the mortgage arena.
But the rules, as set out in the 1985 Housing Act, are complex. Local authorities are prohibited from lending below the standard national rate. Its level is set against the rates charged by building societies - which most recently have set rates ranging from 5.79% to 3.50% for existing borrowers.
Campaigners hope that such restrictions could be lifted, enabling councils to lend at rates they have negotiated in the money markets.
Leslie said: "While we still believe that councils should have complete freedom to judge for themselves the rate at which to offer mortgage loans to their residents, we welcome the encouragement from the government. Many people are suffering because of the turbulence of the housing market and through no fault of their own are unable to get mortgage or remortgage finance from the banks.
"The private banking sector's mistrust of one another means that it should fall to the public sector to ease liquidity and offer mortgage finance to the public. With the capital markets more willing to trust local authorities than the private banks, councils could prudently pass on cheaper mortgage capital to some of their residents."
While lenders have increasingly demanded larger deposits from aspiring home owners councils may be prepared to accept smaller down-payments, as they were in the 1970s.
It was not immediately clear last night how quickly councils - which have continued to be able to offer mortgages - would revamp their home loan products.
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