Plans to cap housing benefit for thousands of mentally ill, elderly and other vulnerable people in supported housing are to be re-examined after protests by MPs and charities.

The rethink, expected within weeks, also follows evidence from the National Housing Federation, which found that 85% of schemes to build new supported and sheltered homes for vulnerable people have been shelved by housing associations because of fears that the new funding system will make them unsustainable.

More than 700,000 people in supported housing usually have the accommodation element of their costs met entirely through housing benefit. But under plans announced by the government in 2015, and due to be introduced from next year, these payments would be capped in the same way as for people renting in the private sector.

As accommodation costs are higher in supported housing, because of the extra services and communal spaces provided, charities and others critics say the proposed system would leave residents facing big potential shortfalls. This is despite ministers saying that they could get help from special funds run by local authorities.

The plans have caused an outcry, with charities warning the system would be bureaucratic, unworkable and would leave people facing uncertainty and worry about whether they could afford to remain.

Supported housing provides a secure, safe place for the most vulnerable, the majority of whom are older people or those with long-term disabilities, as well as the mentally ill, people with disabilities, those at risk of homelessness and women fleeing domestic violence. An inquiry by the communities and local government and work and pension committees in parliament, called for an urgent rethink, saying: “In particular, we have been concerned by reports of providers choosing to postpone or cancel investment decisions, as well as increased levels of anxiety among vulnerable tenants who fear they may no longer have the guarantee of a home for life.”

The communities secretary, Sajid Javid, told a recent session of the communities and local government committee the report had been “very helpful” and he expected to announce a decision soon that would show ministers had listened. Pressure for a climbdown is mounting before an opposition day debate on supported housing that will take place on Wednesday.

On Monday the charity Rethink Mental Illness will publish a report showing people with the highest needs, and the highest costs, are likely to suffer the biggest shortfalls in rent.

The charity says this will be most evident in parts of the country where rents are cheapest and therefore housing benefit payments will be lowest. Research has shown the cap will mean housing benefit will only cover about two thirds of accommodation costs in some parts of the country.

Gillian Connor, head of policy partnerships at the charity, said: “We are hopeful the government has listened to the consensus of the sector: that a one-size-fits-all approach to supported housing will not work and will leave some of the most vulnerable people in society at risk. It is looking increasingly like the government has heeded these warnings and may be about to take a different approach to reforming this vital support.

“We would absolutely welcome a rethink and a chance to shape reforms that ensure everyone is able to get the support they need.”

Caroline Abrahams, a director of Age UK, said: “We would be pleased and relieved if the government has decided to rethink its proposed policy. With an ageing population, we need more supported housing for older people in this country, not less, but the proposals threatened a postcode lottery, with many providers having to withdraw services or close schemes altogether. The consequences for older people of pressing ahead would have been disastrous, so it’s very good news if the decision has been taken to adopt a different policy approach.”

Labour’s shadow secretary of state, John Healey, said: “These plans remain a sword of Damocles hanging over homeless hostels, women’s refuges and sheltered housing for the frail elderly. The chaos caused by the Conservative plans has already halted 85% of new supported housing. Ministers must use this week’s Labour-led Commons debate to drop their flawed plans for good, and guarantee long-term funding building on the recent cross-party select committee report.”