How does an IVA deal with the equity in my house?
Your creditors will expect to get their hands on the equity in your house as part of your IVA. There’s a simple reason – if there is equity and you don’t offer it up, they don’t have to support your IVA.
An IVA has to be a ‘fair balance’ between you and your creditors. They can decide whether it’s fair or not and believe me, after twenty years of IVA proposals, they expect your equity. They have the option to vote down your IVA. If they vote down your IVA and you end up bankrupt, then the Official Receiver will get all of the equity – and if you can’t do a deal with him, he has the power to have your house repossessed and sold.
We will ask you for an estate agent’s valuation of your property. You should make sure that you get a written sale valuation from a local firm of estate agents. It should be set at a level to obtain a sale in a reasonable time – say three months. We don’t want to know what you could get if you left your house on the market for two years.
We will ask you for a redemption statement – the amount needed to pay off the money you owe on the house - from your mortgage company. We’ll need the same information for any other loans or charges you may have on your house.
The redemption statement may well be more than the amount left to repay on the mortgage, because if you were to sell your house you may have incur extra fees for early repayment – for example, you will be penalised for settling a mortgage early if you had a special low rate deal and a ‘lock in’ period of a couple of years.
Once we have the valuation and the redemption figure we can estimate the equity in your house and calculate the value of your share.
It’s not reasonable for the creditors to expect you to get a mortgage for more than 75% of the value of your property – the ‘loan to value’ or LTV ratio – especially given you are looking at an IVA to settle your debts.
So if your house is worth £100,000 the biggest mortgage you are likely to get is £75,000.
If the redemption value on your current mortgage is £80,000 you have no equity that you could realise – so no problem.
But let’s assume the worst. Let’s assume your redemption figure is £60,000 so you have £15,000 of equity that you could realise.
How much of a problem will this be?
Remember that an IVA puts you in control.
First, your proposal to creditors will say that this equity has been identified and is fixed. So you know how much to need to raise - £15,000 in our example.
Secondly, the proposal will say that this fixed amount of equity will be introduced after the fourth anniversary of the IVA. So you know when the money has to be raised – four years from now. So you have bought yourself some time.
Third, don’t forget that over the next four years you will be paying what you can reasonably afford into the IVA. You won’t be struggling to keep on top of huge credit card bills – interest is frozen and debts are fixed. So you will be able to budget and get used to living with the debt in your life under control. You will have four years to get used to paying into your IVA and you’ll still be paying off your current mortgage.
Now, you might have got this far and thought you’ll end up with this debt forever – your creditors will just get the money from the remortgage and you’ll be stuck with a bigger mortgage for another 25 years.
Here’s the clever bit. Remember that an IVA puts you in control? Once you’re in an IVA you can ask your creditors to accept changes. If you make a good case, the creditors will usually help you. The creditors like nothing more than an IVA that finishes early and gives them a good payout.
So hold tight, here’s some numbers.
It’s 2006. You enter an IVA. The redemption on your mortgage is £60,000 which includes a £3,000 fee for early settlement – you got a good deal a couple of years ago on a low interest period. Your 25 year mortgage has 23 years to go.
The IVA was accepted by creditors. You offered to bring £15,000 of equity in after four years. Your monthly mortgage payments are £300 a month. Your payments into the IVA will be £350 a month.
Still with me? OK, it’s now 2010.
You come back to us and we will put you in touch with a decent mortgage broker. Remember, we’re here to give you clear, ethical advice – we’re not going to stop now. We will not put you with anyone who will rip you off. Our broker can get good deals from big high street lenders – at a competitive rate of interest.
You’ve got to find a remortgage that will pay off the old mortgage first. You’ve been keeping up your payments on the old mortgage, which now has £55,000 left to pay over another 19 years.
Don’t forget you’ve got to find the extra £15,000 you promised. So you need a remortgage for a total of £74,000.
Here’s the next clever bit. If you’re going to get a bigger mortgage you will have less money left to pay into your IVA every month. So here’s the offer you make to creditors:
“Four years have gone by. I said I would raise £15,000. I’m ready to remortgage. But if I do, I will have no money to make any more monthly payments. So will you accept the £15,000 in full and final settlement of my IVA?”
Creditors will bite your hand off. Your offer means they get a lump sum paid now and the IVA gets closed. If the IVA gets closed early, then the fees and costs are less. If the fees and costs are less, the creditors get a little bit more than they might. Best of all, they can close the file a year early and forget about you.
And here’s what you do next. You are already spending £300 a month on the old mortgage. But the creditors have agreed you can close your IVA. So you will have another £350 a month in your pocket – the IVA will stop. So you’ve got £650 a month free to go and spend on buying a remortgage.
And guess what? £650 a month for a £74,000 mortgage should get you a mortgage over maybe 12 years.
Yes, you have a bigger mortgage but for a shorter time – 12 years not 19 years.
And the IVA bought you four years to deal with the problem – that’s four more than bankruptcy would have given you.
And at least you can apply for a remortgage – you can’t if you’re bankrupt.
And you kept the house – less likely if you’d been bankrupted.
Speak to our insolvency practitioner today. We’re a small firm, not a call centre. We’re not listed on the stock exchange so we can concentrate on giving clear, ethical advice and not on selling you something that’s not right for you to meet a sales target. We are here to help, not judge. Make that call now.