Bankers to challenge government over 'dangers' of direct benefit payment

Lenders fear that government plans to pay housing benefit direct to tenants will make it more risky for them to lend to the sector. They say borrowing costs could rise to reflect the increased risk.

The meeting comes as a report published this week showed arrears increased when housing benefit was paid to tenants rather than direct to their landlord. Under the study, London & Quadrant Housing Trust paid housing benefit direct to tenants, who then paid their rent. Their study is similar to the government's proposal, being tested in the private rented sector, where tenants are paid a flat rate of housing benefit.

The group of lenders – the chief executive of the Housing Finance Corporation, the head of social housing finance at Abbey and the head of social housing at Barclays – will meet the Department for Work and Pensions on 18 March to discuss the L&Q study and the government's nine housing benefit pathfinders.

The L&Q study found that the group's arrears would almost double from £2.5m to £4.5m if all of its eligible tenants received the benefit themselves.

Almost two-thirds of tenants in one pilot area had personal debts and 7% admitted that they had used their housing benefit cheques to pay off these debts.

Mike Donaldson, the trust's director of corporate strategy, said benefits should be paid a fortnight in advance and a fortnight in arrears rather than four weeks in arrears, so the landlord could spot quickly whether a tenant was getting into difficulty with their rent.

A DWP spokesman said the pathfinders were progressing well and the L&Q pilot showed that arrears decreased when tenants were given face-to-face explanations of the scheme.