Tenants on benefits are a big “slice of the cake” when it comes to the private rented sector, a market in the UK that landlords can't easily dismiss. And under the Renters (Reform) Bill, landlords will not be in a position to discriminate against tenants on benefits for housing, as refusing them is likely to be made illegal. See our separate article, ‘Are no DSS blanket bans being outlawed?’
Around 40% of National Residential Landlords Association (NRLA) members say they rent to tenants on Universal Credit, and this figure is increasing according to their research, with some saying they have lowered rents to enable a tenant to remain in the property. Government figures show that more than a third of private renting households claim housing benefit, and around 39% of all renters in London claim benefits for housing.
But renting to tenants on benefits remains a contentious issue - 45% of landlords the Government canvassed said they were unwilling to accept them. And given the current rental shortage, landlords will ultimately still be able to decide who they let to, even if there is a change in the law. The vast majority of landlords do not discriminate against DSS tenants because they are mean spirited, but with local housing allowances lagging behind rents - although this is set to change -the number of available rental properties at affordable levels for benefit tenants is under threat.
Yet DSS tenants’ often stay longer, wanting the stability of a long-term lease, and with social housing supply insufficient to meet demand, there is always a queue of DSS tenants for private landlords who are willing to accept them, even those who have invested at the lower end of the market.
With the Government’s announcement that it will unfreeze Local Housing Allowance (LHA) rates from April 2024, and legislative change banning discrimination against ‘DSS tenants’ on the horizon, in this guide we’ll explain the challenges and advantages of renting to tenants on benefits.
Housing benefit is gradually being replaced by a national roll out of Universal Credit, which is the new way the Government pays out housing benefit.
Whereas housing benefit is paid out from local government, either bi-weekly or four weekly, Universal Credit is paid monthly from central government.
The idea behind Universal Credit, which was introduced in 2013, is that it aims to simplify the way in which benefits are received, replacing six previous benefits. People who are new to applying for support receive Universal Credit instead of these six benefits, which include jobseeker’s allowance and child benefit, and are now known as ‘legacy benefits’.
The housing element of Universal Credit is a means tested benefit to help people on a low income pay their rent. If they qualify, renters can claim this benefit whether they are in or out of work. The amount they can claim is governed by something called the Local Housing Allowance (LHA), a mechanism used to set rent levels for private rented properties of differing sizes and within specified areas.
The rent support levels are set using the 30th percentile rent for properties of different sizes within each “Broad Rental Market Area” (BRMA). It is currently (November 2023) based on rents surveyed in 2018/19, up to national maximum amounts. The 30th percentile is a statistical measure used to determine rent limits. It means that the rent limit is set at a level where 30% of the rental prices for properties of a certain size in a specific area are at or below this limit. The idea is that housing benefit recipients can access housing that is affordable but not necessarily the cheapest available.
The LHA rates are decided by the Department for Work and Pensions (DWP) using information provided by the Valuation Office Agency (VOA). BRMA is a geographical area designation used for assessing differing housing benefit rates. It groups together areas with similar rental markets to determine rent limits for different types and sizes of properties.
However, with support frozen at March 2020 levels based on rents in 2018-19, campaigners have long been urging the Government to restore the LHA so that it reflects the real costs of renting. Shelter claims that in nine out of 10 areas support lags behind rents, and recent NRLA research showed that only 15% of landlords who presently let at LHA rates will carry on doing so when the current tenant leaves, with almost a quarter saying they will sell the property. Almost 60% of landlords are looking to re-let the property, but said they cannot keep the rents to LHA levels. This, says the NRLA, is evidence that the issue is not with landlords wishing to sell property, but rather the LHA rate is simply insufficient, even where landlords wish to provide property for social good.
In his Autumn Statement on 22 November 2023, Chancellor Jermy Hunt revealed that he had listened to the many organisations who have campaigned for the unfreezing of the LHA, announcing that LHA will be unfrozen and increased to the lower 30% of rents nationwide from April 2024 onwards.
This will provide a substantial boost to the poorest tenants, as well as helping landlords to keep renting to tenants on benefits, many of whom have been letting tenants continue to stay in properties while paying significantly below market rent.
The NRLA welcomed the announcement:
Freezing housing benefit rates was always a disastrous policy, hitting as it did many of the most vulnerable tenants across the private rented sector. Taking steps to reverse this change will provide vital support for tenants who are in receipt of the LHA, making it easier for them to access and sustain rental tenancies.
Ben Beadle, CEO of the National Residential Landlords Association (NRLA)
Despite the positive move to unfreeze the LHA, there are undoubtedly challenges but also negative stereotypes associated with tenants on benefits, or “DSS tenants” as they came to be known, and which became commonplace with the discriminatory “No DSS” advertisements. The acronym stems from the legacy government department, the Department of Social Security.
This practice is likely to be banned under the Renters (Reform) Bill - the Government says: “We will legislate to make it illegal for landlords or agents to have blanket bans on renting to families with children or those in receipt of benefits and explore if similar action is needed for other vulnerable groups, such as prison leavers. We will improve support to landlords who let to people on benefits, which will reduce barriers for those on the lowest incomes.”
Some landlords resist accepting low income tenants because of the fear of the tenant not paying or being unable to pay rent when they are on housing benefit or Universal Credit. According to the National Housing Federation, there is some evidence to support this fear, as they say the proportion of tenants paying with Universal Credit remains at 33-34% but these tenants account for 56-58% of total arrears.
However, in an economic environment where people are struggling financially, there is evidence of a slow increase in total arrears, including an increase in average arrears for households paying by their own means.
This trend has not helped by the freezing of the LHA rates – which govern the maximum amount of support for rent that low-income private renters can get and – have been frozen in cash terms since March 2020, as already mentioned.
On the other hand, market rents for new lettings have increased by more than a fifth on average, over this period. The result is that the proportion of new private rental properties advertised on the major property portals - those affordable to housing benefit or Universal Credit recipients, with rents fully covered by the LHA – has fallen from 23% to five per cent since the allowance freeze. This means that the majority of claimants are unable to afford these properties without the means to top up the allowance out of their own pockets.
While there are variations between the nations and regions in the UK, the decline in affordability has been felt across the country, with the share of properties that are fully affordable for benefit claimants ranging from 2.5% in Wales to 6.9% in the North East. These findings are from a new analysis by The Institute for Fiscal Studies (IFS), funded by the Joseph Rowntree Foundation, which investigates the affordability and quality of private rental housing for claimants of Universal Credit and housing benefit.
That said, many landlords have positive experiences letting to tenants on housing benefits or Universal Credit. They find that having the consistency of rental support through benefits, the tenancies are stable and tenants such as families stay longer than self funding tenants.
One of the issues with Universal Credit has been that the temptation to spend the housing element of it - especially if a large amount comes through on the first payment - can be too great for some tenants. It then becomes difficult to get them back on track. Landlords can help their tenants to avoid this temptation by suggesting they go for direct payments.
By default the housing benefit portion of Universal Credit is paid to the tenant. But the tenant can request that the DWP approve what is known as an ‘Alternative Payment Arrangement’. These payments can be arranged to be made directly to the landlord. A regular standing order can be made to a landlord’s account, this way rent is paid first before any other benefit monies are taken out. You can find out more about alternative payment arrangements here
An alternative to that method is to arrange a third party payment through a bank such as a credit union. Some of these credit unions have what are called ‘jam jar’ accounts. These automatically separate money for rent and bills from their client’s “spending money,” and the rent portion is paid to the landlord.
Often new claimants of Universal Credit for rent payments will be coming from a job and will be able to support themselves in the first month or so using their final earnings payment. However, there is a process available for tenants to request a Universal Credit “new claim advance” to help them pay their rent if they can’t manage until their first monthly Universal Credit payment comes through.
As with job seekers allowance, Universal Credit requires out of work tenants to commit to keep looking for work. So long as the tenant complies, or their low earnings remain the same, payments will be maintained. Payments would only stop with a significant change of circumstances, such as starting a higher paid job. Job centres have work coaches to help their clients to maintain their claims.
Where benefit fraud is involved, landlords are not expected to pay back the housing element of Universal Credit unless they are in some way involved in the fraud.
If a tenant who pays you from their Universal Credit is having difficulty paying their rent, you can apply for a direct payment or rent arrears deduction. This is a new online service for landlords to request direct payments of rent or reclaim rent arrears. It replaces the existing UC47 process. Guidance on when to request a managed payment or rent arrears deduction, or both, from a tenant’s Universal Credit can be found in the Alternative Payments guide.
As a landlord it’s your responsibility or your agent’s to assess a tenant’s ability to afford the rent, whether on Universal Credit or not. As with renting to friends and family, it’s wise to do credit checks and take up references regardless of the type of tenant you rent your property to. In fact, given the discrimination laws it is important that all tenants are assessed in the same way as self funding tenants.
To avoid being accused of discrimination, you should have a standard tenancy application form and a standard set of questions that you ask of any tenant. Always keep these for future reference.
Most buy-to-let mortgages do not restrict who you can rent to. However, it’s worth checking with your mortgage lender first.
Not all landlord insurance policies will provide cover regardless of the type of tenant you have. Total Landlord Insurance does and will not penalise you in any way for taking on Universal Credit tenants. However, it is always a good idea to check with your insurers.
You may be asked about the type of tenant you are considering and whether they are in work, and whether their Universal Credit will cover most of their rent. Some insurers may adjust the cost but it is unlikely they will refuse cover.
If you’re concerned about your tenants’ ability to pay you may consider having a guarantor, usually a relative who is willing to take on the responsibility of guaranteeing their rent payments if they are in default. Read our article about guarantors for more information.
Rent guarantee insurance may be available, which covers rent payments if your tenant meets financial difficulties. Most good landlord insurance policies will cover legal expenses, with free professional advice and any fees related to legal proceedings, malicious and accidental damage.
To help make sure a tenancy with a tenant on Universal Credit is successful, you should become familiar with the rules around housing benefit or Universal Credit by reading the Universal Credit and rented housing guide for landlords. It’s important you understand how the process works and the payment cycle. As mentioned, local councils pay tenants housing benefit two weekly, four weekly or calendar monthly, whereas the Department of Work and Pensions (DWP) pays Universal Credit tenants monthly. Your tenancy agreement should match this cycle.
You can help the process along by advising your prospective tenant on how to negotiate the application form filling.
Generally, the information provided to the DWP by your prospective tenant is private and you cannot intervene in arrangements made between those two parties.
However, you can do a lot to help your tenants with a housing benefit or Universal Credit claim if you have the necessary knowledge. Many tenants will be happy for you to assist with a claim and help them sort out the details with them. They may also be happy for you to set up direct payments together and will probably welcome your assistance.
You may worry about renting to “DSS tenants” but in reality many renters claiming benefits make excellent tenants. Landlords or their agents need to do the right background checks and have a reasonable knowledge of the rules surrounding housing benefit or the housing element of Universal Credit. You also need to check with your landlord insurance provider and mortgage company to make them aware of the type of tenant you are renting to.
