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IVA and Your Home

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Can a Homeowner Use an IVA?

 

IVAs are often used by homeowners and can help to protect your property from creditors. It’s a popular debt solution because it deals with your assets more flexibly than bankruptcy.

 

Because an IVA is a type of personal insolvency your assets (including a house or apartment you own) are relevant to the arrangement.

 

What is Equity?

 

Equity is the amount of money you’d expect to receive if your property was sold.

 

It’s calculated by subtracting your mortgage balance from a valuation of your property.

 

If your home is valued at £150,000 and your mortgage balance is £100,000, you are calculated to have £50,000 of equity.

 

To estimate your equity you can get a free property valuation from a website like Zoopla and contact your mortgage provider for a mortgage redemption statement.

 

Jointly-Owned Homes

 

If your home is jointly-owned the equity figure is your share of the money that a sale would generate.

 

Your share is usually 50% unless there’s a legal agreement defining a different breakdown of ownership.

 

If your jointly-owned home is worth £150,000 and your joint-mortgage balance is £100,000, there is £50,000 of equity in total. Your 50% share of that equity is £25,000.

 

Your co-owner’s share of the equity is protected (unless they are also entering an IVA).

 

Shared Ownership Scheme Homes

 

If you purchased your home using a shared ownership scheme, your equity is the amount of money you’d receive if your property was sold.

 

If you own 50% of a shared ownership scheme home worth £150,000, and your mortgage balance is £50,000, you have £25,000 equity.

 

If you jointly own this home you personally have £12,500 equity.

 

IVA Equity Release Clause

 

Homeowners usually have an “equity release clause” in their IVA agreement.

 

This clause typically requires a homeowner to value their home and attempt to release equity in the final year of the IVA. If they are successful the equity released is paid into their IVA.

 

If you cannot get a new mortgage to release equity your monthly IVA payment is usually extended for a year instead.

 

Equity Release Clause Safeguards

 

A number of safeguards are commonly built into IVA equity release clauses.

 

It’s vital to know that your individual voluntary arrangement is not a standardised document and equity release clauses vary. Please also be aware that creditors might propose modifications to your equity release clause before your IVA gets approved.

 

Common safeguards include:

 

  • Keeping 15% of your interest in the value of your equity.

 

  • A new mortgage will not exceed 85% of the value of your home.

 

  • Not releasing equity (or extending the IVA) if less than £5,000 of equity is due to be released.

 

  • The additional monthly mortgage payment capped at 50% of your IVA payment.

 

  • The new mortgage doesn’t extend beyond your state retirement age or the scheduled end-date of your existing mortgage.

 

  • Your IVA ends early if your new increased mortgage payment makes a realistic IVA payment unaffordable.

 

Check your equity release clause (and any safeguards) and don’t sign-up until you fully understand what you are committing to do in the final year of your IVA.

 

Can You Get a New Mortgage?

 

An IVA will seriously damage your credit rating so it will probably be impossible for you to get a new mortgage from a mainstream lender.

 

A twelve months extension of IVA payments may be the most likely outcome but this is not guaranteed.

 

Mortgage lending criteria could change in the future. This might mean that suitable main mortgage products exist when you reach the final year of your IVA.

 

Second-charge (secured loan) mortgage products may also be available.

 

Secured Loans

 

A secured loan is an extra mortgage that can be borrowed in addition to your main mortgage.

 

The interest rates for secured loans are typically higher because the lender has less security.

 

Your IVA provider could require you to take out a secured loan to release equity if the wording of your equity release clause allows this.

 

Secured loans are a potentially lucrative market for a small pool of lenders offering products to a captive audience. You could find yourself paying a high rate of interest for a long period of time after the IVA has finished.

 

Other Ways to Deal with Equity

 

An equity release clause determines how much money you should attempt to pay into the IVA. It does not require that you secure extra debt against your home, or extend the arrangement for a further year, if the money can be paid into the IVA by other means.

 

If you’re lucky enough to have a relative or friend (or any other third party) who can pay the money into your IVA, your equity obligation can be settled in this way instead.

 

Risks for Homeowners

 

An IVA is an excellent debt solution that enables thousands of people to overcome serious debt problems. Your house should not be at risk if you fulfil the agreement.

 

Like all other types of debt solution there are some risks and disadvantages that you should take into account.

 

Most homeowners will benefit financially from adding an extra year of payments to their IVA rather than securing extra debt upon their home. This is likely to cost less in the long-term and reduces other types of risks.

 

It’s not your choice whether to release equity or extend the IVA. You’ll be required to attempt to release equity in the final year of the IVA. This could involve being presented with expensive secured loan offered by a lender that is known to your insolvency practitioner.

 

Mortgage lending is typically long-term debt. Even after your IVA has finished, you could effectively be paying towards the debts that you put in the arrangement for years.

 

Securing unsecured debt against your home is inherently risky. It makes it more likely that you’ll become unable to pay your mortgage and/or secured loan if you suffer any future financial disruption. This could put your home at risk if you get into arrears on your mortgage payment.

 

There is a risk of being made bankrupt during your IVA if you fail to make your payments or don’t cooperate with your IVA provider. This isn’t common but, in the event of being made bankrupt, the equity in your property will be dealt with less flexibly than under an IVA. The sale of your home may be required.

 

Receiving Property – Windfall Clause

 

Your IVA will contain a windfall clause related to property or money that you receive during the arrangement. This covers scenarios like receiving an inheritance.

 

If you inherit a house or flat during your IVA it might have to be sold and the proceeds paid into the arrangement.

 

Selling Your Home During an IVA

 

You cannot sell your home during your IVA without the permission of your insolvency practitioner.

 

If you do sell the property the proceeds (the equity) may have to be paid into your IVA.

 

Alternative Debt Solutions and Equity

 

Equity in your home will be treated less flexibly if you choose to become bankrupt. Unless a third party (like a relative or friend) can pay the value of your equity to the bankruptcy trustee, it’s likely that your home will have to be sold.

 

You cannot use a debt relief order if you are a homeowner.

 

A debt management plan is not a formal insolvency and your home is not included in the plan. A homeowner is not compelled to sell or release equity from their house/flat during a DMP. This debt management solution may well be suitable if you have too much equity in your property for an IVA to be acceptable to your creditors.

 

Get Expert IVA Advice

 

For expert advice about using an IVA and other debt management solutions please contact us.

 

We’ve been helping homeowners to deal with their debts since 2007. Our debt advisers are professionally qualified and offer confidential non-judgmental help.

 

 

Author: Andrew Graveson

Qualified Debt Adviser & IVA-Guide.co.uk Founder

 

Page Last Updated: 31/07/2020

 

 

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