Direct benefit payments will push up arrears, lenders warn

A project to pay housing benefit directly to tenants rather than to their landlords will lead to rocketing rent arrears, lenders have warned.

The Council of Mortgage Lenders is pressing the government to extend its two-year pilot scheme, which starts in October in the private sector, to social housing so lenders can assess its impact on housing associations "sooner rather than later".

Under the trial, the Department for Work and Pensions plans to pay a flat rate of housing benefit direct to private-sector tenants in 10 local authority areas.

It hopes to extend the idea to social housing once rent restructuring is completed in 2010.

But Andrew Heywood, the CML's senior policy adviser, said the social-sector pilot should take place alongside the private-sector trial. He said: "You could test payment of rent to tenants, which is the more problematic part, without using the flat-rate allowance. If there are problems, it's better to see them sooner rather than later."

Heywood added that lenders were concerned arrears would go up under the pilots, and that rent restructuring, which effectively caps rent increases by councils and housing associations, would mean associations would not be able to recoup the money by raising rents. He said: "Existing finance might be placed in jeopardy by falling revenues. Some housing associations have significant records of poor collection and they might have difficulty in raising finance in the future. It's another significant risk to the sector which it doesn't need."

The Council of Mortgage Lenders is pressing for a meeting with the DWP early next month to discuss the issue.

A DWP spokesperson said the results of the private sector pilot would "inform and shape" the social sector version. It would not pay benefits direct to housing association tenants alongside the private sector pilot.

London & Quadrant Housing Trust is running its own pilot paying housing benefit to tenants. Mike Donaldson, director of corporate strategy, said landlords should be able to decide whether benefit was paid to them or their tenants. Its report on the pilot will be published in autumn.

The CML's warning appears to confirm the findings of a report by the National Housing Federation, which warned that banks would be more cautious about lending to the sector if benefit was paid to tenants (HT 4 April, page 15).