If you own a house an IVA might be a good debt solution for you. However you need to be aware of implications such as the requirement to release equity in the 5th year of the agreement.
Included in this article:
- How does an IVA affect your House?
- Will you have to release Equity?
- What if the property is in Joint Names?
- Remortgage to settle your IVA early
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How does an IVA affect your house?
If you start an IVA, your house will be legally protected from your unsecured creditors. They are no longer allowed to take action against it to enforce the repayment of the money you owe.
Remember, your mortgage and any other secured debts are not included in the Arrangement. These still have to be paid. A sufficient amount must be included in your living expenses budget to cover the associated monthly payments.
Your mortgage lender may be told that you have started an IVA. However they will not be concerned as long a you continue to make your payments on time.
If you are struggling with your mortgage an IVA might help. It will reduce your unsecured debt payments thus freeing up sufficient cash to pay your mortgage on time.
Will you have to release Equity from your Property?
It is important to understand that if you are a home owner, your IVA will include what is known as an equity release clause. This requires you to try and release equity from your property to increase the amount of debt you repay.
The equity release clause kicks in on in the 5th year of the Arrangement. Normally around month 54, your IVA company will tell you to get an up to date valuation. They will use this to calculate the equity in your property (based on 85% of the market value less the outstanding mortgage and any secured loans).
If based on this calculation, your share of any equity is less than £5000 it is ignored. The Arrangement will finish after you have made your agreed payments.
Where you have more than £5k of equity, you will have to see if you can release any of it by either remortgaging or with a secured loan. As a safeguard you cannot be asked to increase your mortgage or secured debt repayments by more than 50% of your current IVA payment.
If you are unable to remortgage due to your income or other factors, your IVA payments will be extended for an extra 12 months instead.
What if your House is in Joint Names?
A third party is not responsible for paying your debt. As such if your house is owned in joint names their share of the equity is excluded from your IVA.
In these circumstances once you have calculated the total amount of equity in your property the joint owner’s share is protected. The maximum amount you can be expected to released is the total of your share.
If you start a Joint IVA 100% of the equity of a jointly owned property is taken into account. As such if your partner’s debts are relatively low it may be better for then to consider an alternative solution so their equity is protected.
Can you Remortgage your Property to Settle an IVA early?
As a home owner you do not have to wait until the 5th year of your IVA to release equity. You are allowed to remortgage sooner and settle the Arrangement early.
Normally you can only settle early if a lump sum can be provided by a third party. However it is also possible to use cash you have released from your property with a remortgage.
Do not remortgage during your IVA without prior agreement that equity released will be used to settle early. Without such agreement any funds released may be treated as a windfall and you could lose them.
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