Numerous studies have documented the importance of individual variation (IV) in determining the outcome of competition between species. However, little is known about how the interplay between IV and habitat heterogeneity (i.e. variation and spatial autocorrelation in habitat quality) affects species coexistence at the landscape scale. Here, we incorporate habitat heterogeneity into a competition model with IV, in order to explore the mechanism of spatial species coexistence. We find that individual-level variation and habitat heterogeneity interact to promote species coexistence, more obviously at lower dispersal rates. This is in stark contrast to early non-spatial models, which predicted that IV reinforces competitive hierarchies and therefore speeds up species exclusion. In essence, increasing variation in patch quality and/or spatial habitat autocorrelation moderates differences in the competitive ability of species, thereby allowing species to coexist both locally and globally. Overall, our theoretical study offers a mechanistic explanation for emerging empirical evidence that both habitat heterogeneity and IV promote species coexistence and therefore biodiversity maintenance.