Are you in the last year of an IVA and have a house with equity? You may have to try to remortgage your house or get a secured loan to pay some of the equity into your IVA. This is called “equity release”
This article looks at the questions people have about how equity release works in an IVA. If you are thinking about an IVA, you need to know about this before signing up.
In 2023, most people in the last year of their IVA will have an IVA using the 2016 Protocol. These documents can be found here. But IVAs are individual agreements and the wording of your IVA may be different. I am only discussing the standard terms here.
How much equity do you have?
The starting point for equity release is how much your house is worth.
The cost of any house valuation should be paid for by your IVA. Often your IVA firm will commission one themselves, but if you are asked to get a valuation, you should be reimbursed for the cost.
If your IVA firm says your house is worth an amount that sounds too large, offer to get a more accurate valuation from local estate agents. It’s important to get a realistic figure. the number should be what the house should sell for, not what you might put it on the market at. In 20-23 this can be hard – tell the estate agent you do not want an optimistic number.
Your IVA firm may 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 repayment charges. When I say mortgage amount in this article it includes these extra charges and also any secured loan that you have.
The equity in your house is then the difference between the house valuation and the mortgage amount. So if your house is valued at £190,000 and the mortgage amount is £105,000 your equity is £85,000.
How is the equity release calculated?
The 15% calculation
A typical IVA says you are allowed to retain 15% of the value of your house. So working out 85% of the value of your house determines how much equity you may have to release. If the existing mortgage (including 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 less than £5,000, 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 releasing equity;
- £170,000 is more than your mortgage, so you need to try to remortgage for an extra £30,000 to take the mortgage up to the 85% level;
- if your 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.
Jointly owned houses
If you have an IVA but your partner doesn’t, when it comes to equity release your partner keeps all of their share of the equity. You are allowed to keep 15% of your half of the house.
If you both have IVAs (you may think of this as a joint IVA but actually it is two interlocking IVAs), then the calculations are much the same as if only one person owns the house. You each get to keep 15% of your half of the house value, which together adds up to 15% of the value of the whole house.
The only small variation is that because you each have an IVA, the calculation is done separately for each of you on your half of the house – so each calculation has a £5,000 minimum, giving a £10,000 minimum overall. It is possible your IVAs are worded differently, but this is the normal case.
Three extra limits on equity release
There are three extra forms of protection for you in your IVA:
- the additional mortgage costs cannot be more than half of your monthly IVA contribution. So if you are paying £150 a month, the larger mortgage can’t cost more than £75 more than 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 plus the IVA fees;
- typical IVAs say: The re-mortgage term does not extend beyond the later of your State retirement age or the existing mortgage.
“I’m only managing the current IVA payment with difficulty”
Here you need to ask NOW for the IVA payments to be reduced so they are more affordable. Contact your IVA firm with a list of your expenses that have gone up.
This is very important when it comes to equity release. You may think you can manage for just another few months, but the amount you are paying at the moment affects the amount you may have to pay to release equity – see point (1) above.
If you can get your IVA payments reduced, it means equity release will cost less and it may even become uneconomic so you don’t have to release equity, just pay for another year.
If the last year has been very difficult, it may look impossible to carry on for another year. It is sometimes possible to get your creditors to agree to your IVA being completed now “on the basis of funds paid to date” – that means with no extra payments or equity release.
This needs your IVA firm to propose a “variation” to your creditors because it involves changing what you originally agreed. This is more common with the rising cost of living and higher mortgage payments. But it can also happen if you have health problems or your income has reduced.
Talk to your IVA firm about this. And do it now, don’t delay.
“Do I have to pay for a 6th year if there isn’t enough equity?”
No. A typical clause in an IVA says
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 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 to the IVA firm, see How to Complain about an IVA.
“I am being told I have to take a secured loan”
Most people have a clause that says “Remortgage includes other secured lending such as a secured loan.” These secured loans can be at very high-interest rates. Readers have been quoted 15, 16, 19% or even more.
If your IVA firm is pushing you to get a secured loan, leave a comment below this article.
Very often the IVA firm can be persuaded to drop the suggestion if you push back hard enough and object strongly. The two main things to do are:
- argue that your current ICVA payments are too high and need to be reduced (see above);
- argue that the proposed loan would be unaffordable especially if you have a mortgage fix ending in the next few years.
Also if either of the following cases applies to you, tell your IVA firm as it’s unlikely that you can get a secured loan:
- you have a shared ownership house. Here it is highly likely that your Housing Association says you cannot get a secured loan. If your IVA firm says something like – well just don’t tell your Housing Association – you should immediately put in a formal complaint;
- with a Government Help To Buy mortgage you would need permission from the Homes England Mortgage Administrator to take out any further loans. That is unlikely to be granted.
Are you thinking about an IVA?
If you looking at an IVA, do some calculations using possible different values for your house in 5 years time. I suggest three – one optimistic, one no price change and one somewhere in the middle.
You need to ask your IVA firm to explain to you how much equity you would have to release in each of these three scenarios.
If the IVA firm just says that it won’t be a problem, persist. Say you want them to confirm how much you will have to remortgage for if your house is worth A,B or C and your mortgage is worth X.
If they won’t tell you this, or you don’t like their answers, go and find a different firm! Seriously.
And read the bit above about “secured loans” – it’s scary stuff!
Ask your IVA firm to confirm if you may have to take out a secured loan. If they say yes, ask them what safeguards there are against this being at a really high-interest rate. If you aren’t happy with their answer, walk away and talk to a different IVA firm such as StepChange.
Don’t start an IVA with a firm won’t explain in detail to you what will happen at the end. Assurances that you won’t have to take a secured loan are worth NOTHING unless they are in writing.
Updated October 2023