Harry Street, 70, collected an arsenal of weapons after being freed in 1994, including guns and a home-made bomb.
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The pensioner was first detained under mental health laws after he shot five people dead in 1978.
Street, then called Barry Williams, gunned down three of his neighbours in West Bromwich, in the Midlands, before killing an elderly couple at a petrol station in Nuneaton, Warwickshire.
He was detained indefinitely in Broadmoor high-security psychiatric hospital after pleading guilty to manslaughter on the grounds of diminished responsibility in 1979.
But the killer was released 15 years later and sent to live in a Birmingham hostel just six miles from the scene of the first killings.
He changed his name to Harry Street and moved to Wales before returning to live in a quiet street in Hall Green, Birmingham, seven years ago.
The pensioner amassed a hoard of guns and it was only painstaking work by a police officer which led to his arrest and stopped a probable repeat of the massacre.
Officers found a makeshift bomb at the Birmingham home he shared with his wife Beverley and daughter Amy, 18, as well as 50 home-made bullets, two pistols and a revolver.
Street admitted possessing firearms and explosive materials and was detained indefinitely at Birmingham Crown Court in October. Mr Justice Blair ruled he remained a danger to the public and ordered he never be released.
Yesterday it emerged the mass killer died at the high-security Ashworth psychiatric hospital in Liverpool on Christmas Eve.
Jill Burkitt, 53, whose brother and parents were killed in the 1978 massacre, said: “The devil has gone back to hell. It was always my fear that one day he would be released again and hunt me down.
“No-one likes to hear of anyone dying but in his case it was best for everyone.”
Ms Burkitt was shot eight times but survived the 1978 massacre in which her parents George, 48, and Iris, 47, and brother Phillip, 20, were killed.
Former neighbour Warren Smith, who was the target of Street’s six-year hate campaign in Hall Green, said: “I feel shock but also relief.
“I was actually visited a week ago by the probation service who talked about his possible future release one day. I couldn’t believe what I was hearing as he should never have been released after killing five people, so it was a very worrying visit.
“He was a very clever guy. He played the system and serious mistakes have been made.
“So yes, I am relieved, but I would not say I am happy as we actually got on well with his wife and daughter and I do feel sorry for them.”
It was only after Street’s arrest in October last year that police discovered he was the killer Barry Williams.
Prosecutor Michael Duck QC told Birmingham Crown Court officers found six guns and an explosive device in a cupboard at the pensioner’s home.
The serial killer made his own bullets before testing his guns by firing them at an Argos catalogue from close range.
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