FINANCE bosses at York council have defended the authority's use of controversial long term bank lending, saying their careful use of the little known "LOBO" loans is good value for money which does not put public money at risk.

City of York Council has two "Lender Option Borrower Option" loans (LOBO) - a type of loan term financing revealed in a TV documentary to make banks millions in interest payments and at times to tie local authorities into punishing interest rates and extra charges.

York's two LOBOs loans of £5 million each run until 2060 and 2077, with current interest rates of 3.66 percent and 3.8 percent. One of the loans was taken out in 2008, on a 69-year term, and the other in 2010, on a 50-year term.

The controversy over the loans lies in the right they give lenders the option to hike the rates at regular intervals, but finance bosses at York say the city's LOBOs, unlike others, crucially do not tie the council into the rates and would let them repay the loan or refinance without extra charges.

Treasury staff responsible for York's public finances said there had been "misguided views" on LOBOs, which could be an effective means of financing when council staff understood them properly.

Ian Floyd, Director of Customer and Business Support Services, said: "City of York Council only ever borrows to fund expenditure on long term assets such as schools or infrastructure and building works.

“The council currently has £269m of loans, of which only £10m - four per cent of the total - are in the form of Lenders Option, Borrower Option (LOBOs)."

York council's loans are simple, or "vanilla", LOBOs, which work like normal bank or Government borrowing, without complex inverse relationships between interest rates, or extra costs to break the agreements and get out of higher interest rates; and have undercut the Government backed Public Works Loan Board on their interest rates.

Mr Floyd added: "The type of LOBOs the council holds is deliberately a small percentage of the overall borrowing to minimise exposure, protect the public purse and ensure these are kept at a level which are comfortable to manage."

“The council’s LOBOs continue to offer good value for money. The council’s overall cost of debt is 3.7 percent and the current LOBOs are at 3.6 percent and 3.8 per cent respectively, meaning that these continue to provide a good value to council tax payers, at no risk and without incurring exit fees.”