The National Housing Federation has welcomed the Government's plan to test the new direct payments system but warned the policy would deny tenants choice and could affect housing associations ability to borrow money to build new homes.

Welfare reform minister Lord Freud announced this week that tenants would be paid the housing element of the Universal Credit directly from 2013 with the exception of pensioners and vulnerable tenants who will continue to see their housing costs paid straight to their landlord.

Lord Freud will run demonstration projects with six councils and their housing association partners next year in order to find out how to best support tenants in managing their budgets and how the Government can support landlords if tenants miss their payments.

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Federation chief executive David Orr said: "We welcome the Government’s decision to test this major policy change to see how it will best support tenants and social landlords.

"But we remain concerned that direct payments will deny tenants the option of having it paid straight to their landlord. In a recent poll, 93% of social housing tenants said they believed it was better for housing benefit to be paid direct to landlords. To deny them at least the choice of how their benefits are paid seems to run contrary to what the Government believes in.

"Banks could also make it more expensive to borrow money making it harder for housing associations to build homes.

"We look forward to working closely with the government to ensure the new policy works in the best interests of tenants and social landlords. We also await further details on how these changes will be implemented and how the Government delivers on its pledge to protect landlords' income streams."

(CD/GK)