Home equity release in an IVA

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.

 

22 thoughts on “Home equity release in an IVA

    David says:

    Hi

    I made my last payment of five years in January. Not heard anything so emailed them in june and they said it’s with there equity team. It is now August and still nothing should it take this long.

      Hi David

      From what you have said I assume you are a home owner? If so, as part of your IVA you will have agreed to release equity from your property in the final year of your IVA (if possible). In or around month 54 you should have got an up to date valuation of your home. If based on 85% of this there was more than £5k of equity you should have attempted to remortgage to release some of this. Where this was impossible for whatever reason your IVA payments would then be extended for 12 extra months. If there was less than £5k equity, the IVA would be completed after the receipt of the 60th payment.

      I can only assume that this is what your IVA company are waiting to establish. It is certainly very poor that you have had no communication from them for 6 months….. I suggest you get on the phone and speak to someone at your IVA company asap to understand just what is going on.

    Natasha says:

    Hi

    My ex husband and I are close to getting our decree absolute. We currently own between us a joint 50% share of a shared ownership property (25% each) and the other 50% by the management company. I have been in my iva now 30 months and 24 x months from now will have to look at remortgaging by 54 month.

    With this in mind as part of the consent order my ex husband and I agreed as part of our divorce that once the IVA is finished I will take over the property completely and he will relinquish all rights. This will be in 2024. How will this affect my 54 months remortgage as would it mean my ex would need to sign documents re remortgaging of property even though our consent order states that eventually I will take over flat at such time I can do so post IVA.

    He hasn’t worked in three years and doesn’t contribute to property. Even now. I do know that should I not be able to remortgage that I can extend a year and hope that this would be the preferred option.

      Hi Natasha

      As I understand it, you will need try and remortgage your property in 2 years’ time (2022). This is 2 years before you take over your ex’s share of the property. As such if remortgaging were an option in 2022, I believe you would both have to sign the documents.

      That said, given yours is a shared ownership property, I am confident that you will not be able to remortgage in 2 years to release equity for your IVA. With shared ownership, mortgage lenders will normally only lend for the purpose of buying a greater share of the property, not for any other reason.

      As such I believe that the requirement to release equity will have to be ignored, and your IVA will be extended for the extra 12 months

    Adrian says:

    Hi I’m going into an iva nothing is signed yet . I’m joint mortgage and my partner certainly won’t agree to an equity release what so ever my ip has told me I won’t need to worry if this is the case as I’ll just pay for 72 months instead of 60

      Hi Adrian,

      My advice is this. Before you sign your IVA proposal document, read the terms and conditions (particularly the equity release clause). I would be sure that the clause will be clear. Legally speaking it will bind you into attempting to release equity from your property if there is any in the 5th year. The clause will state that equity must be released if it is possible to do so.

      The question therefore, is whether a joint mortgage holder’s refusal to sign paperwork etc to re-mortgage constitutes a sound argument to state it is “not possible to release equity”. I know a number of IPs who agree with this statement. As such they will assure clients that the equity release clause can be ignored in these circumstances (as you have been). I would simply caution that you get this in writing from them.

      The issue is not that they can’t be trusted. The problem is what happens if they choose to stop trading or retire in the next 5 years and your IVA is sold on to a different IP? If this were to happen (it is more common that you might think) the new company might have a different approach to enforcing the terms you signed up to.

      Given this, my advice is always good to have the written agreement to fall back on if required.

    Sandra says:

    Hi. My IVA is coming to a end at the end of the year. I’ve spoke to the company today about my property. They said that they will contact me in May to discuss a mortgage. I asked how it would work with me having a 20% first time buyers laon. The lady just said she didn’t want to give me false information and to wait to hear from them in May. Could you explain how it would work? Thanks

      Hi Sandra

      I assume you bought your property with the government Help to Buy scheme. If so, you will have been given a loan through an organisation called Target. The loan is normally 20% of the purchase price.

      When considering whether or not you have equity in your property which could be released as part of your IVA, you treat your Target loan as a 2nd mortgage. So you calculate your equity as follows:

      85% of the current market value of your property.
      Less the total outstanding on your first mortgage
      Less your target loan (20% of the current market value or the amount you borrowed whichever is the larger)

      If the figure you are left with is your equity. If this is less than £5k, the equity clause in your IVA is ignored and the Arrangement will finish as normal after the last agreed payment. If the figure is greater than £5k you will need to see if you can release any equity by re-mortgaging. If not your IVA will be extended for 12 months.

    Stevie E says:

    I am 3 years into an Iva. Can I sell my property? And if so how much equity would be taken from the sale

      Hi Stevie E

      Normally it is not a good idea to sell your property during your IVA. If you do, the amount claimed by your IVA company would be the equivalent of the total original debt you owed (less payments already made) plus their fees and charges, plus interest charged at 8% from the start of the IVA.

      In other words, you would be likely to repay much more than the debt you originally owed.

      You might consider selling and not telling your IVA company. Generally speaking, this is not possible. Normally they will have placed a legal restriction on the property which means it cant be sold without their agreement.

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