The London Borough of Tower Hamlets will work with housing associations to build around 70 new homes.
The council is required to spend this money quickly or it gets returned to the central government, with interest added on top.
The council is concerned that despite housing being built in the borough in recent years, they “are not affordable and within reach of most residents to either rent or buy.”
The council are approaching housing associations that meet the criteria they have set.
The criteria includes the following; a good local knowledge of the borough’s housing market, the finances in place to deliver the scheme, officially recognised on the Homes and Communities Agency list of registered providers and extensive experience in developing affordable housing.
The scheme, Local Authority Grant Fund for Registered Providers, will mean the housing associations can only build homes for those on the 21,000 household heavy council waiting list.
Part of the agreement will be that the homes have to be built by 2017, with the grant making up to 30% of the total development cost.
Tower Hamlets received 12 initial responses from housing associations.
Each housing association that bids for the grant will be judged on affordable homes, secure tenancies and the proportion of homes which are designed for those with disabilities.
Cllr Rachel Blake, cabinet member for strategic development said: “This scheme represents an innovative approach to dealing with what remains one of the biggest issues the Borough faces.
“We are fortunate to have some housing associations with well-established local links, and I am hopeful that with that crucial local knowledge we will be able to take forward some very strong bids.”
John Biggs, mayor of Tower Hamlets said: “We will do all we can to support the delivery of much needed homes. This scheme allows us to reinvest the money from Right to Buy sales back into the Borough and avoid it having to be paid with interest on top.”
The borough are also considering buying back former leaseholder properties if the conditions and location is right.