If you own a house there is nothing to stop you starting an IVA. However there are various implications you need to be aware of.
- The affect of an IVA on your House
- Will you have to release Equity?
- What if the property is in Joint Names?
- Remortgage to settle your IVA early
The affect of an IVA on 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 their debt.
However 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 these ongoing 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 could be the answer. 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?
As a homeowner one of the requirements of an IVA is that you have to try and release equity in the 5th year of the Arrangement. The money raised goes towards your debt.
On or around the 54th month you will be asked to value your property and calculate the equity. This is done by taking 85% of the valuation and deducting the outstanding mortgage and any secured loans.
This applies to all homeowners whether you own a house, flat or other type of property.
If based on this calculation your equity is less than £5000 it is ignored. The Arrangement will finish after you make your final payment. If it is more you must try and release some of it by remortgaging.
If your IVA started after Jan 2014 you have to try and release equity by either remortgaging or using a secured loan. If it is not possible you will have to extend your payments for an extra 12 months instead.
As a safeguard you cannot be asked to increase your mortgage or secured debt repayments by more than 50% of your current IVA payment.
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. If there is sufficient equity in your house you could remortgage sooner and settle the Arrangement early.
Normally an IVA can only be settled 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.
Your creditors will often agree to this as it reduces their risk. The worry that you will not finish making your monthly payments is taken away. You benefit as you will normally pay slightly less overall and you are no longer restricted by the Arrangement.
You must not remortgage during an IVA without prior agreement that equity released will be sufficient to settle the Arrangement. Otherwise it would be treated as a windfall.