How will the IVA affect the equity in my house?
If you are a homeowner, understanding the obligations an IVA will place on you is very important.
The obligations are laid out in the 'Equity Clause' which is introduced to the terms and conditions of an IVA when the applicant is a homeowner, or owns a share in a property.
The clause lays out rules on how equity will be dealt with and ensures all parties are aware of their obligations before the IVA begins.
The Equity Clause
In principle, the clause is quite straightforward.
A homeowner will be required to re-assess the value in their home at around month 54 of their IVA. Then, the clause dictates how the IVA will conclude, depending on the amount of equity in the property at this time.
If the property has:
- Negative equity, the IVA will complete after 5 years.
- Positive equity below £5,000, the IVA will complete after 5 years.
- Positive equity above £5,000, the Equity Clause will be triggered.
Triggering the Equity Clause
Once triggered, the clause stipulates that the IVA applicant must attempt to release up to 85% of their share of the property's value, via a remortgage or a secured loan.
If a lender can be found who's prepared to provide a loan to someone in an IVA, then these limitations are put in place specifically to protect the applicant from being exploited:
- Remortgage payments must not exceed 50% of the current IVA payment.
- Remortgage must not extend beyond retirement age or, if longer, the term of the current mortgage.
- Maximum released equity limited to 100% repayment to creditors, without statutory interest.
- Remortgage costs must be deducted from released equity.
Whatever amount can be raised within these limitations must be released and introduced into the IVA for the benefit of creditors.
The IVA would then continue for the remaining few months, with a reduction being applied to the IVA contribution equal to the cost of the new loan.
If the reduction takes the IVA contribution to less that £50 per month then contributions stop and the IVA is concluded early.
Failure to raise funds
In the event that the applicant has fulfilled their obligation (to the satisfaction of their Insolvency Practitioner) but for whatever reason, their attempt to raise funds was unsuccessful, this will not be viewed as a breach of the IVA.
Instead, the Insolvency Practitioner has the discretion to either:
- Extended the IVA by up to 12 months.
- Accept 3rd party funds to the value of 85% of the equity.
The Insolvency Practitioner will notify the applicant if and when an extension is to be undertaken.
Important Points To Consider
Here are a few of the more important aspects that need to be considered, which aren't necessarily obvious at first glance.
Homeowners entering an IVA whilst their property is in negative equity should understand that future equity will not be ruled out.
Just because there may be no equity at the outset of the IVA, doesn't mean creditors will forego their right to include any future equity that may develop during the term of the IVA. Hence the Equity Clause will still be included.
Under the terms of the IVA, creditors can only expect 'releasable equity' to be made available, so it's important to note straight away that not all equity is releasable equity.
A secured lender will always try to protect themselves from lending money to someone with a poor credit rating. They do this by restricting the levels of money they will lend, and represent this limit as a percentage of the property's value.
This is the Loan To Value (LTV) ratio, the ratio between a property's value and the amount they'll lend against it.
Lenders adjust the LTV to fit the credit worthiness of the applicant. The more creditworthy the applicant, the higher the LTV and, conversely, the less creditworthy, the lower the LTV will be.
Due to the damaged credit rating caused by the IVA itself, LTV rates for people in an IVA are very low.
As of early 2014, LTV rates available for people currently in an IVA was 50%, although these rates will inevitably rise as confidence returns to the market.
The LTV limitations should mean that, for IVA applicants with modest levels of equity in their home, being able to raise funds via a remortgage or secured loan will be extremely unlikely.
Firstly, the co-owner's equity is safe and can't be claimed by creditors, however, they will be asked to give their consent to allow access to their co-owners equity.
You should seek further clarity from your Insolvency Practitioner as to their interpretation of the Equity Clause and how they will seek to enforce it.
If you would like a free consultation to discuss how an IVA will be applied to your circumstances call 0800 088 7502.
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