If you have a house you may have to try to remortgage in the fifth year of your IVA. If you aren’t offered a remortgage you will probably have to carry on making monthly payments for an extra year. This article looks at the questions many people have about how this works. It will be of interest if you are thinking about a starting an IVA or you are coming up to this equity release decision about six months before your IVA ends.
Many people who are currently at the equity release point will have had their IVAs based on the 2010 Protocol. An IVA set up more recently is likely to be based on the 2014 or 2016 Protocol. These documents can be found here. But it is important to remember that IVAs are individual agreements and it is possible that the wording of your IVA may be different.
“Do I have to get a house valuation?”
This will be a cost for your IVA. Often your IVA firm will commission one themselves, but if you are asked to get one, you should be reimbursed for the cost.
Your IVA firm may also ask you to get a redemption statement from your mortgage lender – this says what it would cost to repay your mortgage now, including any early redemption charges. When I say “mortgage amount” in this article it includes these extra charges.
The equity in your house is then the difference between the valuation and the mortgage.
“How does the 85% calculation work?”
The “85% calculation” determines how much equity you may have to release. The aim is to ensure that after an equity release you will be left with at least 15% of the value of your house. If the existing mortgage (plus any secured loans) is larger than 85% of the current value then there isn’t enough equity to remortgage. There is also a “de minimis” clause, which says that if the remortgage would be £5,000 or less, there is no need to remortgage.
Example: solely owned house, value £200,000 with £140,000 mortgage
- 85% of value is £170,000 – so this is the maximum possible mortgage after a remortgage;
- £170,000 is more than your current mortgage, so you need to try to remortgage for an extra £30,000 to take your mortgage up to the 85% level;
- if your current mortgage had been £165,000 or more, then there would have been less than £5,000 equity to release and no remortgage would be needed.
This example is taken from Annex 7 to the 2014 Protocol, but the calculation is identical in the 2010 Protocol. The Annex also gives other examples e.g. what happens if the house was jointly owned and your partner wasn’t in an IVA – in this case your partner’s half of the equity will remain untouched.
“Do we each get a £5,000 minimum in a joint IVA?”
Yes. You may think you have a joint IVA, but actually you have two interlocking IVAs. The result is that the calculation is done separately for each of you on your half of the house/mortgage and each calculation has a £5,000 minimum. (It is possible your IVAs are worded differently, but it would be unusual.)
“Do I have to pay for a 6th year if there isn’t enough equity?”
No. The 2010, 2014 and 2016 Protocols all say: “If the amount of the debtor’s net worth net of remortgage costs in the home at the review date is under £5k, it is considered de minimis, and does not have to be released, and there would be no adjustment to the IVA term.” So the extra year is there as a substitute in case you can’t get a remortgage. If there isn’t enough equity to release, there is no need to extend your IVA.(Again it is possible your IVA is different, but this is how most work.)
“My IVA company isn’t doing the calculations right!”
It is possible that the wording of your IVA is different. However, there are reports on internet forums such as iva.co.uk and MoneySavingExpert of some very odd calculations being put forward by IVA firms – in most of these cases the IVA firm changes its mind when challenged.
If their figures sound wrong, I suggest you set out your situation using the exact format of Annex 7 of the 2014 Protocol (download) and ask your IVA firm to explain why its calculations are different. If necessary put in a formal complaint, see How to Complain about an IVA.
“Help, there is a lot of equity!”
If there is a large amount of equity in your house, there are two extra protections that may reduce what you are asked to remortgage for:
- the extra mortgage costs cannot be more than half of what you are paying as your monthly IVA contribution. So if you are paying £150 a month, the larger mortgage (or the secured loan) can’t cost over £75 more than what your current mortgage costs;
- you won’t be asked to remortgage for an amount which means your creditors get more than your debts repaid in full.
“I want to stay with my current mortgage lender”
You can’t insist on this. However the chance of a different lender offering you a remortgage is very low in today’s mortgage market, so it probably isn’t worth worrying about.
“I don’t want rejections on my credit file”
If your IVA company says you have to get two rejections to prove that you can’t remortgage, this can seem very annoying. But your credit record will be very poor anyway for the six years the IVA is on there. Although credit refusals aren’t good for your credit score, they “age” quickly – by the time the IVA drops off it’s unlikely to make any difference that more then a year before you had a couple of mortgage rejections.
“Do I have to get a secured loan?”
These secured loans can be at incredibly high interest rates – see this article on a reader who was told by his IP he had to take out a 15 year secured loan at nearly 19%.
I think in the future this will be a big problem. People who are taking out an IVA now, under the 2014 Protocol, will have a clause that says “Remortgage includes other secured lending such as a secured loan.”
Most current IVAs, including all those based on the 2010 Protocol, do not have this clause – they just refer to a “remortgage”. The term “remortgage” doesn’t include taking a secured loan. So unless you have agreed to a variation of your IVA terms, for example, to include the 2014 or 2016 Protocol, you don’t have to agree to a secured loan. Ask your IVA firm to explain why you have to have a secured loan and then put in a formal complaint.
If you have agreed to a variation, you may still have very good grounds for challenging this. Read IVAs and secured loans – how to complain which looks at this subject in more detail.
“I can’t manage another year of payments”
The first thing is to check that you have enough equity to be asked to re-mortgage. If you don’t, then you aren’t going to have to pay for a 6th year so it’s not a problem.
If you have just struggled through to the end of the five years and can’t see how you can carry on, it may be possible to get your creditors to agree to your IVA being completed without you making any additional payments at all. This will need your IVA firm to propose a “variation” to your creditors because it involves changing what you originally agreed, but this is quite a common thing to happen. Talk to your IVA firm about this.