Brokers are warning that dramatic council ‘effective bankruptcies’ will increase local residents’ tax bills and so hurt mortgage affordability.

This follows the news that Birmingham council, the largest local authority in Europe, is declaring itself to be already effectively bankrupt.

And a survey of 47 local authorities in the Midlands, the North of England and on the South Coast has revealed a severe strain on finances – particularly acute in 26 of the councils.

The survey was conducted by the Special Interest Group of Municipal Authorities (Sigoma) which says that some member councils were considering issuing a section 114 notice, which freezes all non-essential spending. This is widely known as ‘effective bankruptcy’.

Councils said the most common cause of financial pressures was demand for children’s social care services following requests from the government to treat those services as an equal priority with adult social care, and allocate additional funding. Other significant factors cited were inflation costs and wage rises, with warnings an imminent increase in the cost of borrowing is set to add further financial pressure.

S114 notices have been used only rarely in the past – by Hackney council in London 2000 and Northamptonshire County Council in 2018, but more recently by Thurrock, Woking, Croydon and Slough authorities.

Now one broker – Gary Bush, financial adviser at the Potters Bar-based MortgageShop – says: “Councils going bankrupt will mean mortgage holders having higher Council Tax bills when their monthly budgets are already strained to the max with ridiculously high utility bill costs and higher mortgage rates. Mortgage affordability has only just started to improve slightly but higher council tax could hit it for six.”

Justin Moy, founder at Chelmsford-based mortgage broker EJF Mortgages, agreed and added that local house prices could also be hit: “Inevitably, as a local council goes into bankruptcy and some form of recovery process, local residents will see significant increases in their council tax costs, and other core services will need to be paid for privately. These additional costs will need to be factored into the overall affordabilty assessment for any new home purchase or remortgage, and that will only go to reduce their borrowing power overall, enough for buyers to downgrade their budgets if they want to get on the housing ladder. It will be another influence in the reduction of local property prices, too. There is a significant knock-on cost to the actions of these councils, and others who may be sailing near the wind financially.”

Amit Patel, adviser at Welling-based mortgage broker Trinity Finance, says central government must act as a matter of priority: “Austerity cuts since the Government was elected over a decade ago and gross misuse of public funds by some local authorities will now have a huge impact on borrowers as councils will inevitably increase taxes to plug the gap in their dire finances. Central Government must do its job and fund more money into local authorities before it’s too late, forcing even more councils into issuing a section 114. Prevention is better than cure.”

And Graham Cox, founder of the Bristol-based broker Self Employed Mortgage Hub, concludes: “Increased council tax bills will certainly feed into lenders’ affordability checks, reducing how much people can borrow. It feels like all the chickens are coming home to roost for this Government and the housing market. Interest rates need to be cut now, otherwise the economy and property market will nosedive in 2024.”