The government has been accused of “trashing” plans to build more social housing across the UK after it imposed a shock interest rate rise on cheap Treasury loans.

Councils reacted with frustration to the one percentage point increase on public works loan board (PWLB) finance, which was imposed “out of the blue” this week, warning it could delay or scupper housebuilding and regeneration schemes.

They said rise would lead to fewer council homes being built, and would reduce local authorities’ ability to build and maintain schools, roads and waste facilities, and invest in commercial property.

“It presents a real risk that capital schemes, including vital council house building projects, will cease to be affordable and may have to be cancelled as a result,” a spokesperson for the Local Government Association (LGA) said.

Sharon Taylor, the leader of Stevenage council, said: “It’s another big blow for local government finance. The need nationally is for good quality, affordable housing. My view is only councils can deliver that. Why would you want to slow that down in the middle of a housing crisis?”

She said the sudden rise had “trashed” Stevenage’s plans, worked up in recent months, to accelerate a scheme to build 500 homes for social rent. The town has 2,500 families on the council housing waiting list and rising homelessness.

The number of new homes built for social rent has fallen by almost four-fifths in a decade, according to official figures, with just 6,000 constructed in 2017-18. Despite the governments’ apparent enthusiasm for councils to take on a bigger housebuilding role, town halls fear the rate rise will hit hopes of a social housebuilding revival.

London First, a business lobby organisation, said: “With the base rate low, and Brexit looming, it is ridiculous that national government is making it more expensive for local authorities to invest in their communities.”

It is believed the rate rise was prompted by Treasury concern over a recent surge in borrowing by UK councils to invest in offices and shopping centres as a way of creating a new revenue stream to cover ever-widening gaps in their budgets caused by years of austerity cuts.

Spelthorne council in Surrey hit the headlines after borrowing £1bn from the PWLB to fund a huge commercial property portfolio. The aim was to cut its reliance on government funding to run local services. It reportedly banked £7.5m from its property investment last year – about a third of its annual revenue budget.

However, fears that councils’ multibillion-pound exposure to the commercial property market could turn sour in the event of an economic turndown led to the announcement of an inquiry by the National Audit Office earlier this year.

Councils borrowed nearly £8bn from the PWLB in 2018-19, a 77% year-on-year rise in new loans, prompting speculation that they wanted to build up capital reserves before an anticipated post-Brexit interest rate rise. Wednesday’s increase – from 1.81% to 2.82% – applies to new loans only.

The LGA estimates the rate rise will add about £70m to financing costs for all new loans to English councils, a change that will scupper housebuilding projects already on the edge of viability. The Treasury said the new PWLB rates still worked out cheaper than commercial loans.

A Treasury spokesperson said: “This one percentage point increase takes rates back to levels that were available in 2018. Even with this change, the PWLB rates offer very good value to local authorities. We have also legislated to increase the lending limit of the PWLB to £95bn, as part of the government’s commitment that local authorities can access financing to support their capital spending plans.”