Home equity release in an IVA

19/06/2023
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Home equity release in an IVA

An IVA is designed to protect your home from your creditors. However if you start one you will have to sign up to an equity release clause. So what does this mean?

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What is the IVA home equity release clause?

If you are a home owner your IVA will include an equity release clause. This states that where possible and reasonable you have to release cash from your property. This will be paid it into the Arrangement over and above your monthly payments to increase the amount your creditors get back.

The clause comes into effect in month 54 of your IVA. At that point your IVA company will ask you to establish the value of your equity by providing an up to date valuation and mortgage statement. If your share of any equity is more than £5000 you will have to try and release some of this.

For the purposes of an IVA the calculation of equity is based on 85% of the value of your property. So if it is valued at £200,000 the equity calculation will use a value of £170,000.

Your home is not as risk as long as you follow the obligations set out in your IVA proposal. The equity clause has strict guidelines on how much you can be asked to release and what happens if you are refused a remortgage.

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How much equity do you have to release?

Where your share of your property equity is £5000 or less (based on 85% of the market value) you do not have to take any further action. The release clause is ignored and your IVA will end as normal after your last monthly payment has been made.

If your property is owned in joint names with someone else their equity can’t be touched. Only your share is considered. If this is worth more than £5000 you must try to release some of it by either remortgaging or with a secured loan. The amount you have to release is limited in the following way:

Your overall mortgage and secured loan payments cannot increase by more than 50% of your current monthly IVA contribution. So for example if your current IVA payments are £200/mth your mortgage payment can not increase by more than £100/mth. This will significantly restrict the amount of equity that you are able to release.

The IVA equity release rules for Protocol Compliant IVAs were updated in September 2021. For these type’s of IVA, if you have less than £5k equity on day one, you do not now have to revalue your home or release equity in year 54.

What if you are unable to release any money from your home?

Even if your share of the home equity is greater than £5000 you may not actually be able release any of it. There could be a number of reasons for this.

Firstly given your poor credit rating very few lenders will consider you. The ones that do will charge high rates of interest. This will often mean that to release anything at all your mortgage payments would have to go up by more than 50% of your IVA payment. This is not allowed. On top of that your age may be a limiting factor or a joint owner may simply refuse to give their consent to make any mortgage changes.

If given all these limitations you are unable to release any equity no further action is taken regarding your property. Instead your IVA will be extended for an additional 12 months. During this time your current payments continue and you remain subject to the conditions regarding increases in income or windfalls.

If you cannot release the equity in your property for whatever reason it is yours to keep. After the first review in month 54 it can’t be reconsidered.

 

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22 thoughts on “Home equity release in an IVA”

    Lisa says:
    10/12/2019 at 11:38

    Hello, I am in the last part of my IVA and they are asking about remortgaging. I am not sure where to go for this & not sure if there is any equity in my property.

    Reply
      James Falla says:
      10/12/2019 at 11:56

      Hi Lisa

      To establish if there is any equity on your property you first you need to get a market valuation. Ideally this needs to be as low as possible. I suggest you speak to a local estate agent. Don’t mention anything about your IVA. Just say you need to sell your property quickly because of a job change or something. Ask for a price to realistically sell within 3 months.

      The estate agent should then send you their sales pack with the valuation in writing which is what you need. You can then tell them circumstances have changed and you are no longer selling….

      Once you have your valuation for the purposes of most IVAs you take 85% of this figure. Then you deduct the mortgage and any other outstanding secured debts. The amount you are left with is the equity. If the property is jointly owned you split it (normally 50/50). If your share is greater than £5000 you will have to consider remortgaging. You will then need to speak to a specialist lender about this.

      If based on the above you do have equity but are unable to remortgage the length of your IVA will be extended for 12 months instead.

      Reply
    Steve says:
    18/02/2020 at 15:39

    Hi, I’ve been looking for an answer to a question for a friend of mine who recently asked me for some help about his IVA. He is dyslexic and struggles with paperwork and computers. He started an IVA in early 2014, so it’s now in it’s 6th year and the company supervising his case has told him he must remortgage his house in order to pay off the balance of what he owes.

    According to the paperwork he’s shown me, there is a company which can arrange a remortgage even for someone with a poor credit rating due to the IVA. However, if he was to remortgage, he would end up remaining in debt for the rest of his working life, whereas it was his, and my understanding that the whole point of an IVA was to reduce debt and have some of it written off, rather than get into even further debt.

    This leads to me a question, which is this. Can an IVA company insist that a client remortgages his house or can he decline to do this and instead, request an extra year to be added to his arrangement? Or does it depend on the terms of the agreement? He has been unable to find a copy of the original proposal / agreement which he signed and in any case, the company now administering his case is not the one he originally started with. Do you think a copy of the original agreement would have been lodged with the insolvency service?

    Reply
      James Falla says:
      18/02/2020 at 15:47

      Hi Steve

      The standard IVA terms (known as the IVA Protocol) require the individual to attempt to remortgage their property in the 54th month of the Arrangement and release as much equity as possible. However this does not necessarily mean paying off the entire balance of the original debt. There are certain protections which restrict the amount that must be raised.

      For example the mortgage can only ever increase up to 85% of the value of the property and the mortgage payments can’t rise by more than 50% of the current IVA payment (this is discussed in further detail in the second section of the above article).

      Whether your friend’s IVA is standard or not can only be determined by looking at the original terms he signed up to. As such you / he will have to get a copy of this before you can establish what is what and if his agreement is more onerous.

      The Insolvency Service do not hold copies of IVA proposal documents. The only place a copy of his original IVA can be found is the IVA company now administering his case. They must be able to produce this. If they can’t I would suggest they will have a tough time proving that their demands (rather than more standard ones) are correct and will have to fall back on the protocol terms by default.

      Reply
    Siobhan says:
    05/03/2020 at 11:51

    Hi, I have a joint iva with my husband its a 6 year iva with a possible extra 12 months. we have now paid in for over 5 1/2 years and the ip still have not asked for us to release equity. so I am presuming because they say we still owe 12k that we will have to pay the extra 12 months.

    my Sister has offered to gift me 6k but only if they accept it as full and final payment I just want to know is it worth a conversation with them? the 7 years will be up in july 2021.

    Reply
      James Falla says:
      05/03/2020 at 12:07

      Hi Sioban

      If you have not heard anything from your IVA company about releasing equity from your property I suggest you contact them yourself and ask about it. I think it is very unlikely that they will simply ignore the equity clause in your agreement. It is possible they have just overlooked the fact that they should have contacted you about it.

      When you speak to them you can certainly ask about settling your IVA early with a lump sum from your sister. Most IVA companies would be keen to do this. However you will normally have to offer the equivalent of your outstanding payments. So for example if you still owe £12k you will probably have to offer around this amount. Otherwise your creditors will just say no thanks and wait for the monthly payments.

      Reply
    Jordan says:
    08/04/2020 at 17:17

    Hi. I am considering an IVA

    I have around 30k worth of debt and after doing a budget with a debt advice charity I can offer around £400 a month to my creditors

    I expect this amount to rise over the next 3 years as I am due some signifigant payrises. I also expect to have an amount of equity in my house come the 5th year

    So my question is; if the IVA is agreed and the debt to be paid back 30k – if when it comes to remortgaging I am a able to do this – can they make me remortgage for so I have paid back more than the 30k (thus recouping the interest they would have got if the IVA didn’t exist?)

    Reply
      James Falla says:
      08/04/2020 at 17:34

      Hi Jordan

      The answer to your question is yes. If your pay increases during your IVA meaning you are able to repay the full £30k you originally owed, the arrangement does not end there. The terms of your IVA will state that on top of this you also have to pay the IVA company fees and costs and interest charged at 8% pa from the start date of the IVA. As such the interest alone over 5 years would be £12000. The fees and costs are likely to be around £6k.

      So in the scenario you have outlined you would have to pay up to £48k. Even having paid the original £30k you would still have to remortgage and release equity to go towards the additional fees and interest.

      Given this I would seriously consider whether an IVA is the right solution for you. If you are likely to be able to repay the full £30k in 5 years I would say a debt management plan is a better option for you. A DMP means you repay the debt you owe but generally speaking no further interest or charges. In addition there is no obligation to remortgage.

      Reply
    Hussain says:
    04/05/2020 at 21:57

    Hi

    I am in the last year of my IVA. The company sent me a letter confirming that their agent will be getting in touch with me about remortgaging. They did contact me and asked me for so many question about my circumstances to see if I can release some lump sum. But after a few days they called me to say you can’t release any money on your property. They told me to let my iva company know.

    So my question is what is going to happen if we can’t release any money how many more months or years will this continues?

    Thanks

    Reply
      James Falla says:
      14/05/2020 at 19:01

      Hi Hussain

      Given you can’t release equity from your property, the terms of your agreement will normally state that your payments must be extended for another 12 months instead. However this would only be the case if the amount of equity in your property is greater than £5000. If it is less (based on 85% of the value of your property) then no extra months will be added and the IVA will complete at the end of the originally agreed term.

      Reply

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