Analysis by Risky Finance of PWLB data has shown that if councils were to repay their £62bn debts, they would have to pay £29bn in early repayment fees as a result of a repayment rule change in 2007.
In 2007, the loan board amended its interest rate structure, which meant that councils repaying loans early would have to pay an extra penalty.
At the time, the PWLB - a statutory body, which is part of the Treasury’s Debt Management Office and provides loans to public bodies - acknowledged that the change “may be perceived by local authorities as raising the cost of debt restructuring”.
Before the rule change, PWLB loan rates stood at 5% compared to today’s 2.5%.
Councils are now keen to pay back their higher, pre-2007 higher rate loan. But because they are being forced to pay early repayment penalties fewer councils are clearing their debts ahead of time and are carrying on with standard repayments, Risky Finance said.
Christian Wall, head of local government at financial advisory service PFM, told PF that the rule change was “pernicious, as its full impact has been creeping up on local authorities” and it means that they “cannot take advantage of low interest rates”.
Wall added: “If interest rates rise then they are likely to get rid of, or significantly amend, the fee structure but this would be a long term process.”
Nick Dunbar, financial analyst at Risky Finance, said: “If [a] council wanted to repay the 5% loan today, it would have to pay a penalty to the PWLB to compensate for the fact that the lender could only charge half that interest rate if it lent out the money again.”
