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Monday, January 12, 2009

Local Housing Allowance

The Local Housing Allowance is one subject that seems to raise the heckles of landlords judging by the response to our recent article about the way the Local Housing Allowance is being implemented differently for private landlords and public sector landlords such as housing associations.

The old Housing Benefit system

For those landlords that may not have come across the Local Housing Allowance it is this governments replacement for the old system of housing benefit. This system as most landlords would testify was far from perfect. There were often delays in the Local Authority processing the application from the tenant which often meant landlords were waiting several months to receive their rent despite having to shell out the mortgage payments. Also the benefit payment was not always for the whole market rent. The housing benefit office at the local authority would make a judgement about the maximum rent charged for the particular rental property. This may have been less than the market rent. Also where the tenant is judged to be able to be afford to make a contribution towards the rent then the amount of the housing benefit payable could be less than the maximum rent. In both cases resulting in a shortfall of rent meaning that the landlord would have either to chase the tenant for the difference which often amounts to a few tens of pounds a month or in many cases not bother and take a defacto rent cut. The big advantage for landlords of the housing benefit system was that at least landlords would get paid direct by the Council meaning that once the process had been completed their rent was guaranteed. NO LONGER!

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The government in their wisdom have decided to replace the housing benefit system with the Local Housing Allowance (LHA), but only for private landlords mind - not for Housing Associations or other social landlords. WHY? Because they think its a good idea for tenants to have complete control of their rental money so they get used to handling their own finances. This makes sense in a kinda idealistic, wishy washy, I'm not responsible for the consequences, dreamy world that most Labour politicians inhabit. However, for landlords that have to live in the real world there are a number of drawbacks of the Local Housing Allowance:

1. Inevitably the Local Housing Allowance will lead to a higher number of rental voids as vulnerable or inexperienced tenants spend their rental money not on rent but other things, leaving the landlord short and in very many cases the tenant eventually homeless.
2. The local housing allowance is anti competitive. The introduction of the Local Housing Allowance only for private landlords and not for social landlords introduces a two tiered system of benefit that favours the social landlords who continue to received payment direct and discriminates against private landlords who will be faced by higher costs of rent retrieval and potentially higher voids. Private landlords who for the most part are amateur landlords (they work as well) are much less well equiped to deal with defaulting tenants than their social landlord rivals who should be professional housing providers with all the additional resources at their disposal such as dedicated legal teams and rent collection departments.
3. The big attraction to private landlords of renting to benefit receiving tenants is the certainty that they will get rental payment direct from the state. A blue chip tenants effectively. Take that out of the equation because of the Local Housing Allowance and what incentive have good landlords with attractive properties got to rent to a benefit receiving tenant rather than an employed professional tenant? NONE!
The result will clearly be less landlords to provide accommodation to tenants receiving Local Housing Allowance giving these tenants even less choice and less attractive rental property than before.
4. Finally, excuse my ignorance about the aims of the Local Housing Allowance which enabled the tenants to have responsibility over their life and money. Well isn't that what the previous system of housing benefit did. Tenants could choose to rent more or less expensive property and where they wanted a better standard of accommodation then they just had to budget for it by making extra payments over and above the maximum rent. Surely this is already a way of exposing tenants to financial discipline without taking a gamble that the tenant wont pay the rent, the landlord might not get paid and the tenant becomes an added burden to the already over stretched social housing sector?


1 comment:

Anonymous said...

With the recent drop in interest rates I have seen a large increase in returns. Due mainly to 2 factors. Interest reduction and LHA increasing reference rent for my area. For example on only one of my BTL mortgages of £164k I have seen a drop of £480 p/m in interest payments :-) This BTL is linked to LIBOR. Several others are linked to BOE base. Unfortunately at the moment I still have a couple that are on fixed rate which at the time was great but now at 5.9% seem expensive. Ho hum, who would have known 5 years ago? They have served me well for that period, and end in 07/09 and revert to LIBOR + 1.3%

Whilst LHA has come in for a lot of condemnation and IMO rightly so, it has meant my area has benefited form the higher average for the broader area. This has produced an additional yield of over £17k p/a and rising as tenancies renew. The downside is of course the ridiculous idea to pay the tenants direct. But with careful management and the co-operation of the H/B office thought a lot of my existing and new tenants have been able to insist on direct payment. Of those that haven't, well time will tell, but to date it seems to be working.

The real challenge I see for me is the release of new funding in time to take advantage of lower purchase prices. I have plenty of my own funds available for deposits on several additional properties, but mortgage funding is thin on the ground I have been doing this for 20+ years long before BTL was even a phrase. I originally did it as a pension instead of letting an "investment" product provide for me. Of course everyone thought I was mad. As time went on and I acquired more properties it soon became my occupation enabling me to sell my other business. Now of course I get "you are lucky". Well like the saying goes the harder I worked the luckier got. They don't know some of the risks I took!

My portfolio consists of 32 tenancies Ranging form small S/C HMO units (studios) up to 4 bed detached houses, with rest made up of 1,2,3 bed flats, and 2 industrial units. The trouble as I see it is I am neither a big player, nor a small one. I am stuck in the middle. Because I have been at this a long time my LTV over the whole portfolio is quite low. I feel even so I don't have enough clout to push on to the next level while BTL funding is so scarce, or very restrictive with the percentage ratios and or product charges.

I did approach one of the largest BTL providers with who I have an exemplary record, with a suggestion that I be offered properties in local my area that were in distress, with a view to relieving the owner of their "problem". As I saw it a 3 way win solution. I was told by the company that they would rather foreclose and dispose of them through the auction process. Personally I can't see the sense in that if all parties are agreeable. I am sure there are legal issues, but nothing too difficult to sort out surely?