IVAs And Homeowners

If you’re a homeowner, this affects whether an IVA is the right debt solution for you. Here we explain:

An IVA helped us keep our home.
“We avoided bankruptcy and were able to get back on top of our mortgage repayments.”

• The benefits of an IVA for homeowners.
• How home-ownership impacts IVA qualification.
• How equity in your home is dealt with.

Note: IVAs are also available to non-homeowners.

Benefits Of An IVA For Homeowners

There are 2 major benefits of an IVA for homeowners:

1. An IVA avoids bankruptcy and the possible forced-sale of your home. In an IVA, creditors are more lenient unless there is enough equity to pay your debts in full.
2. Your mortgage and other secured repayments are budgeted for before IVA payment levels are set. This allows an individual in an IVA to afford and maintain such repayments, thus avoiding repossession.

I’m A Homeowner – Do I Qualify For IVA?

Generally, to qualify for an IVA, you must be technically insolvent. There are two basic tests of insolvency:

• Your liabilities (debts) are greater than your assets.
• You are unable to pay your debts as they fall due for payment.

By assets, we mean items of significant worth that could be sold off to raise money to repay your debts. For example, property or stocks and shares etc.

The equity in your home is its value less the outstanding mortgage and any other secured borrowing.

IVAs With More Equity Than Debt

In the current economic climate, it’s often difficult to sell a home and difficult to get a mortgage or secured loan, therefore we are able to consider cases where the equity exceeds debt and determine if an IVA is the best solution for all parties.

Your Equity In An IVA

By your “equity” we mean your share of the total equity in a property.

Usually, for a matrimonial home in UK insolvency law, ownership is considered to be a 50/50 split between the spouses, unless specifically stated otherwise in the title deeds. It does not matter if the property is in just one partner’s name or who has been making mortgage repayments.

Equity Release In An IVA

Six months before the end of the IVA, (usually month 54) you will be required to obtain an up-to-date valuation and attempt to re-mortgage to release equity to pay into your IVA. There are exceptions, but this is standard for the majority of IVAs.

This is subject and/or limited to:

• If your share of any equity is less than £5,000 you are not expected to remortgage as most of the money raised would be spent on fees and costs of the remortgage so your creditors could see very little benefit.
• The maximum equity to be released is based on a limit of 85% loan to value.
• Your ability to obtain a remortgage.
• An increase in mortgage payments being no more than 50% of IVA payments.
• Affordability.

Increased re-mortgage payments are deducted from IVA contributions until the IVA ends. If this reduces IVA payments to below £50/month the IVA will be concluded at this point.

What If I Can’t Remortgage?

Being in an IVA, your ability to obtain a mortgage may be restricted and it is likely to be on less favourable terms.

If you are unable to remortgage, you will be required to extend the length of your IVA to introduce an amount equal to the equity in your property, but you will not be asked to extend for more than 12 months. If your property is jointly owned, it is only your share of the equity that creditors can look to (unless of course both owners are in an IVA).

In most cases this just means extending the IVA by 12 months

Due to the fall in UK house prices; not being able to release equity as per the terms of many IVA proposals is currently a common occurrence.

IVAs and home ownership can be complex. The information given here should be treated as guidance and not definitive advice as all cases are made up of a unique set of circumstances.

For best advice on how your property or other assets of worth impact your decision to apply for an IVA, please contact us.

If you are in an IVA and your partner (with whom you jointly own the property) is not, only 50% of the equity is a consideration.

Example Cases Of IVAs With Equity

Example A
Mr Jones is in an IVA and pays £200 a month. He lives by himself and owns his own house. Six months before the end of his IVA Mr Jones has his house valued at £150,000, which means that 85% of that value is £127,500. The outstanding mortgage on the property is £120,000.

Total equity is actually £30,000 but creditors will not expect Mr Jones to remortgage for more than 85% of the property’s value which is £127,500. They would therefore expect him to try to introduce £7,500 by way of a remortgage if he can.

If he is unable to obtain a remortgage they would require him to extend this IVA to introduce the £7,500 or for a maximum of 12 months.

Mr Jones will therefore pay another 12 months at £200 and will pay in an extra £2,400 in satisfaction of the equity in his house.

Example B
As above, except this time Mr Jones pays £800 a month into his IVA. In this case Mr Jones would make just over 9 further payments as he would then have introduced the £7,500 in full and his IVA would be concluded.

Example C
Mr Smith is in an IVA and pays £300 per month. He and his partner jointly own their house. His partner is not in an IVA. Six months before the end of his IVA Mr Smith has their house valued at £180,000, which means that 85% is £153,000. The outstanding balance on the mortgage is £120,000.

Total equity is £60,000 but only half of this belongs to Mr Smith, i.e. £30,000. Creditors will not expect him to remortgage for more than 85% of the value of the house which is £153,000, leaving £33,000 of equity to be divided by him and his partner.

They would therefore expect him to introduce £16,500 by way of remortgage if he can. If he can’t then he would pay an additional 12 contributions instead, which would total £3,600.