As a homeowner, one of your concerns about an IVA will be how it affects your property. The rules about what, if any, equity you will have to release changed in September 2021 to give clearer guidance.
Included in this article:
- Key facts a homeowner needs to know about an IVA
- What if there is no equity in your property?
- The rules if there is equity in your property
The rules highlighted in this article only apply to protocol compliant IVAs. You must check the terms and conditions before you sign to make sure you are happy with the agreement.
Key facts a homeowner needs to know about an IVA
The IVA is the only debt solution available in England and Wales that provides legal protection for you as a homeowner. Once the agreement is in place, your creditors can’t force you to sell. In addition, they can’t attempt to secure their debt against your property.
However, your house or flat is a major asset. As such you have to acknowledge that you own it. You also have to give information about its current market value and what if any equity you have in it.
If you have no equity, it is likely that it will not form part of your IVA. But where you do, and there is a good chance that you might be able to release some of it, you will be expected to attempt to do so as part of the agreement.
Equity release where required, is normally by way of either re-mortgage or secured borrowing. This happens in the 54th month of a standard 60 month agreement.
An IVA is designed to protect your house or flat from your debts. However, if you have equity you may have to be prepared to release some of this. The the amount of debt you pay back will increase as a result.
What if there is no equity in your property?
In an IVA, the amount of equity in your house or flat is calculated using 85% of its total value. So if the market value is £200,000, the value used in the IVA calculation will be £170,000.
Given this calculation, if your share of any equity is less than £5,000, it is considered that you have no equity in your property. In these circumstances, you will not be required to release equity during the Arrangement.
This is the case even if house prices rise in the mean time. the IVA will be based on monthly payments only. This is an updated rule within the IVA protocol 2021 which was introduced in September 2021.
A homeowner who has less than £5,000 of equity in their property will not have to release equity as part of their IVA. The agreement will end after 5 years.
The rules if you do have equity in your property
Where your share of the equity in your home is greater than £5,000 one or other of the two following scenarios will apply:
Your IVA will last for 6 years (72 months) with no further requirement to release equity if:
– The total secured borrowing required to raise equity would rise above 45% of your total household earned income (from salary, self-employment and pensions).
– The surplus income you pay into the IVA is £100 or less when it is drafted and agreed.
– Where you are aged above 60 at the start of the agreement.
When the above do not apply, the length of the agreement will be 60 months. However, you will have to agree to attempt to release equity as part of the deal.
Your property must be valued again in the 54th month. If you are unable to release available equity at that time, the number of payments will be extended to 72 months. Once these are paid, the IVA will be completed.
Where you are able to release equity, this will have to be paid into your agreement.
The amount you will have to raise is limited. The additional cost of any new mortgage or secured borrowing can’t be more than 50% of your IVA payment. The mortgage term can’t extend any longer than your existing mortgage or past your state retirement age.
Want free, no obligation advice about whether or not you will be expected to try and release equity as party of your IVA? Give us a call (0800 011 4712) or complete the form below.