IVAs and Home Owners

Home Protection

IVAs over recent years have become an extremely popular alternative to bankruptcy for those having difficulties repaying unsecured debt. A question that is often asked is “Will I have to sell my home?” The simple answer is No, but the creditors may include a clause requesting a debtor release some of their equity during the IVA. This will of course be dependent on there actually being equity available.

Equity

Should an individual be required to release the equity, it will usually be during the 54th month of the IVA term, or near after. Not all of the available equity is expected to be paid into the IVA. According to the IVA protocol updated in May 2010, it is stated that "the amount of net worth to be released will be based on affordability from income and will leave the debtor with at least 15% of his/her net worth in the property." In the event of a remortgage, it I would be a maximum of 85% of the Loan to Value (LTV) and the term of the remortgage will not extend beyond either the debtors retirement age, or the existing mortgage term (whichever is later).

For example, in the case of a sole owner, where the property is worth £250,000 with an outstanding mortgage of £180,000, 85% of the property value is £212,500. After subtracting the current mortgage, the maximum remortgage value would be for £32,500, leaving the debtor with £37,500 (15%) of equity remaining.

Joint ownership

Where the property is jointly owned, and assuming that the income of the 2nd individual has not been taken into consideration for the IVA, then only the debtors share is required for equity release. So using the same example as above but where the debtor owns 50% of the property, the value would be £125,000, with an outstanding mortgage of £90,000. 85% of the property value is £106,250, so the maximum equity that may be required to be released would be £16,250. This will leave £18,750 of equity remaining.

Considerations

The above are just examples of how equity release may be calculated, but it is worth remembering that all IVAs are different, and therefore different individual circumstances may lead to different outcomes. However, the total amount of equity released should not be more than the debt remaining. An individual should always discuss their situation with their IVA supervisor, who can also give help and advice on the remortgaging process. No one will be asked to remortgage if the extra mortgage premium is unaffordable.

(ref: Consumer IVA Protocol May 2010www.insolvency.gov.uk)