Why landlords are shunning profitable benefit tenants
01-13-2014
Why landlords are shunning profitable benefit tenants
Rental Yields (NLA)
Benefit claimants are more profitable than many types of tenants, but landlords are turning them away
Richard Dyson
Britain’s army of 1.4million private landlords are upbeat about 2014, expecting further price rises and rent increases. But in what is a growing political controversy – and a logistical nightmare for local authorities needing to house residents – private landlords are increasingly refusing to let property to tenants on benefits. Mortgage lenders and insurers are also growing wary.
According to the latest data on landlord returns letting property to those on benefits delivers excellent returns. Approximately 100,000 landlords deliberately target this market. And at 6.6pc the average yield for this type of let, calculated as rental income against the price of the property, is higher than for any other tenant group except migrant workers. By contrast, the lowest yields arise in the letting of smarter properties to executives.
Source: National Landlords Association
But the market is changing. Last week Britain’s most celebrated landlord couple, former maths teachers Fergus and Judith Wilson, made headlines with their decision to evict 200 tenants on housing benefit or its current equivalent, the local housing allowance (LHA). The Wilsons, who with about 1,000 properties in their home area of Ashford and Maidstone are among the largest landlords in the country, will also from now on refuse applications from welfare recipients. [Read more about how the Wilsons built their buy-to-let empire]
The Wilsons represent a trend. According to the National Landlords’ Association (NLA), the biggest organisation representing buy-to-let investors, the proportion of landlords prepared to accept tenants receiving LHA has more than halved in three years. In mid-2010, 46pc of the NLA’s members let to tenants who received the benefit. By late last year this had dropped to 22pc, with the NLA commenting that the “decline steepened during 2013”.
Source: National Landlords Association
Several factors are making tenants on local housing allowance less attractive
The first, say landlords, is the local housing allowance itself. It was introduced in 2008 as a way of helping recipients budget. Unlike the previous arrangements, where money was paid from councils direct to landlords, LHA payments go to tenants. Many landlords withdrew from the market at this point, according to the NLA. More recent limits on housing-related benefits and the future introduction of the “universal credit” have spooked others into following suit.
“Change spells uncertainty,” said the NLA’s policy spokesman, Chris Norris. “Many landlords have adjusted to LHA and are now happy – but ongoing welfare reform and doubts about universal credit introduce too much risk for some.”
The second factor is economic. LHA is set at a local level through a formula where, in theory, the payable benefit compares with the rent of the cheapest third of properties available in the wider market that have the same number of bedrooms. In practice, open-market rents in some regions have outstripped the LHA calculations. “It’s very much regional,” said Mr Norris. “In some areas of high demand there is a large and widening gap. In other areas like the North East there is not much difference between the LHA and market values.”
The issue is muddied further by property types. Two-bedroom houses, for instance, are more popular (and expensive) than two-bedroom flats. This distorts the LHA calculations, with the upshot that landlords can sometimes get more in the open market than LHA tenants can afford to pay.
The Wilsons: Read how two former maths teachers made a fortune from buy-to-let
Another factor is mortgage lending...
The biggest landlord lender, BM Solutions (part of Lloyds Banking Group), is prepared to lend to landlords whose tenants’ income comprises benefits. The second biggest lender, Nationwide Building Society through its subsidiary The Mortgage Works, will also lend – but clearly has doubts. It announced in February 2013 that no new mortgages would be advanced to landlords whose tenants received benefits. Three months later, after criticism in the press, it reversed this decision.
David Hollingworth of mortgage broker London & Country, which has a large buy-to-let division, said: “Lenders continue to offer buy-to-let mortgage finance to landlords letting to tenants in receipt of housing benefit, although this type of tenancy has always restricted the choice of mortgage provider. With changes to the benefit system, some landlords may be wondering if their higher yield will be eroded to such a degree that they should turn their attention to a different market.”
...and there is also the issue of insurance
Many landlords insure against tenants falling into arrears, as the cost is relatively low and can be built into the rent. The cost can be deducted from landlords’ profits for tax purposes. Paying a premium of £100 a year, under a typical policy, would mean that a landlord could claim unpaid rent of £2,000 a month, after the first month, up to a maximum period of a year, plus legal and other costs associated with evicting a tenant. But all insurers insist on a tenant credit reference first, and many exclude those without an earned income.
Despite these risks Mr Norris stressed that some landlords, in some regions, remained content to focus on letting to benefit recipients and that “by understanding their market they will continue to enjoy good returns”.
The subject of private landlords profiting from letting to those on benefits is itself highly controversial. But landlords’ refusal to offer their properties to LHA tenants has also caused anger. George Spencer of lettings agency Rentify.com warned: “Landlords should consider the implications of such blanket bans. Not only could they significantly limit chances of finding new tenants, they could also cause a public outcry, a backlash against landlords and further regulation.”