Newham expects to save £143m in interest payments that can now go towards services

This article is more than 1 year old

This article is more than 1 year old

Newham council is claiming victory after striking a deal with NatWest over £150m in high-cost bank loans that it says will save millions of pounds and enable it to boost spending on local services.

The beleaguered east London authority said it expected to save up to £143m in interest payments over the remaining 41 years of the contract – or £3.5m per year – as a result of the deal. It also avoids a full-blown lawsuit, with Newham having withdrawn a high court claim against NatWest’s parent company, Royal Bank of Scotland.

The offending lender option borrower option loans – known as lobos – have been criticised by activists and the shadow chancellor, John McDonnell, for leaving councils on the hook for expensive interest payments that could be diverted to local services.

Newham was in line to pay interest on six lobo loans, each worth £25m, over the next four decades. But after “lengthy negotiations” with the bank, Newham said it would pay off the high-cost loans in full with fresh funding from the government’s Public Works Loan Board (PWLB), at much lower rates of interest.

Newham’s mayor, Rokhsana Fiaz, said: “Over the past 10 years that the loans have been in place, it’s cost us an extra £31m in interest payments compared to borrowing from the PWLB. That’s money that should have been spent on Newham residents.”

Facebook Twitter Pinterest Rokhsana Fiaz. Photograph: Christian Sinibaldi/The Guardian

Lobos controversially gave banks the power to raise interest rates at certain points over their lifetime, accounting for the “lender option” of the loan agreement. Although borrowers had the option of rejecting those terms, it would trigger a clause forcing them to immediately repay the loan in full.

The loans were popular among local councils in the early 2000s as they offered teaser interest rates that kept costs low in the short term. But they proved expensive down the line as authorities were faced with shrinking budgets as austerity took hold.

Joel Benjamin, a spokesman for the anti-lobo lobbying group Research for Action, hailed Newham’s deal, saying “unnecessary” interest payments could “now be spent on austerity-ravaged council services”.

While the council has not specified how much of the projected savings will go directly to local services, Newham said the deal would “remove significant financial risk to the council”.

“This will improve its financial standing at a time of austerity and enable it to invest in services that benefit the Newham residents,” the council added.

The deal comes as RBS tries to wind down the remainder of its near-£1bn portfolio of lobo loans held by local authorities across the country by year-end.

An RBS spokeswoman commented: “We value all our customers and are open to discussing restructuring or refinancing of lobo loans where beneficial for the customer. To this end, we are happy to have commercially agreed pricing with Newham council for early repayment of their loans.”

However, the bank said it did not recognise Newham’s £143m savings estimate.

Newham is still pursuing a high court claim against Barclays over its remaining lobo loans. Barclays converted its lobos to fixed-term loans two years ago, though interest payments were not necessarily affected and breakage costs were only slightly reduced.

Barclays is facing a separate lawsuit by seven local councils including Greater Manchester and Leeds over the terms of nearly £573m in lobo loans taken out between them. The bank plans to defend itself against those claims.