Universal Credit, which will be piloted from April 2013 and subsequently rolled out from October, is the government’s solution to the UK’s unsustainable benefits bill.
The new system will combine almost all benefit entitlements into one monthly payment and will cap the benefit amount paid to each household at £26,000 per year.
This differs from the status quo, where housing costs alone have, until recently, been able to exceed this, irrespective of any other entitlements.
Despite the inevitable impact on some landlords, particularly in London and the South East of England where rents are much higher than the national average, this capping effort is broadly accepted by landlords who are fed up of being incorrectly labelled as a parasitic drain on public coffers courtesy of a few very high profile (and high value) housing benefit claims.
The issue which has many landlords very concerned is the lack of provisions, or mechanisms in place for when things go wrong with a claim.
Currently the Housing Benefit Regulations, of which there are a considerable number, stipulate very clearly that if a tenant fails to pay their rent for eight weeks – having received state support to do so – the landlord may request direct payment.
Furthermore, local authorities are able to negotiate with landlords and tenants, arranging direct payment in return for the continuation of a tenancy or a more favourable rent. It is essentially a win-win situation. The landlord is able to reduce his or her risk of non-payment, in return the tenant is able to agree a slightly lower rent and the local authority has avoided unnecessary homelessness.
We have presented this case to the Department for Work and Pensions (DWP), but have yet to see any practical acknowledgement of the dangers of increased arrears.
This is a major concern for the NLA, because beyond the risk that landlords will lose confidence in their tenants’ ability to pay under Universal Credit, there is the very real possibility that lenders will lose confidence in their mortgagors.
The problem which Universal Credit will create is twofold:
1) It will become harder to identify a household in receipt of housing support. Universal Credit will be paid like a salary, a one monthly payment encompassing many different entitlements. In many cases, it will also support those working and receiving a regular salary, which begs the question: “What circumstances represent a breach in lending covenant?”
2) Without an automatic mechanism to ensure that rent arrears cannot exceed two months, the risk of default leading to non-payment of a mortgage will become too high for lenders to continue to turn a blind eye.
It seems that many landlords are already acting on their concerns and choosing to move out of the Local Housing Allowance (LHA) market. In fact, the NLA has found that landlords letting to LHA tenants have fallen 6% since Q3 and just 29% of landlords now let to LHA claimants. And the introduction of Universal Credit is still eight months away.
The net result will be landlords choosing in greater numbers to avoid benefit recipients of any kind wherever possible and lenders further tightening their lending criteria to prevent exposure to what is sure to become a subprime market.
If the government wants to see the private-rented sector continue to take the strain of housing welfare recipients there are a number of issues which must be addressed to ensure that investment is viable and we do not see the development of an exploitative sub-prime market.
The NLA hopes that the government will respond to our requests to guarantee regular rental payments to landlords if a tenant defaults after two months and to ensure Universal Credit is linked in market rents before its rollout. The NLA also asks that mortgage providers look to lend to landlords of all tenants, irrespective of where they derive their income.
For more information on the buy-to-let market, join Mortgage Solutions at the Buy to Let Market Forum on 30 April and 2 May 2013.
