RSLs use fixed-rate loans and bonds to beat rate rise

Housing associations are scrambling to switch to fixed-rate loans to protect themselves from interest rate rises.

They are moving away from variable-rate borrowing in an attempt to save millions of pounds in interest repayments.

Bob Wilson, head of finance policy at the National Housing Federation, said that in the current climate, every 1% rise in interest rates would cost the sector £100m.

Derek Joseph, managing director of consultant Hacas Chapman Hendy, said: "Over the past year housing associations have got so confident with low interest rates, the amount of protection on their borrowing has reduced. Now they are getting worried this has gone too far."

Figures from the Housing Corporation show that 56% of registered social landlords' debt is tied to changes in interest rates, with RSLs owing £19.6bn in outstanding drawn funds.

Associations got so confident with low rates. Now they are getting worried this has gone too far

Derek Joseph, Hacas

The Council of Mortgage Lenders predicts that base interest rates will bottom out this winter at 3.3%, rising to 4% by the end of 2004, a rise that right now would cost housing associations £70m. Rates currently stand at 3.5%.

In periods of low interest rates, RSLs tend to keep debt in variable rate loans because these are cheaper to set up and more flexible. Associations' efforts to reduce their exposure to rate shifts has resulted in increased numbers of fixed-rate loans or hedged funds – where variable rate loans are effectively "insured" against rate changes – as well as a rush of bond issues.

Places for People, Home Group, North Hertfordshire, Hermitage and Maidenhead-based Housing Solutions Group have all negotiated bond issues over the summer.

Ray Green, finance director for Housing Solutions Group, finalised a bond this week.