Are you in the last year of an IVA and have a house with equity? You may have to try to remortgage your house to pay some of the equity into your IVA.
This article looks at the questions people have about how equity release works in an IVA and what happens if you can’t remortgage.
If you are thinking about an IVA, see this covers what you need to check with your IVA firm before signing up.
During the pandemic, there were special provisions about equity release but in 2022 they have all ended.
Is your IVA a typical one?
In 2022, most people in the last year of their IVA will have an IVA using the 2014 or 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 which 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.
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?
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.
“Help, there is a lot of equity!”
There are two extra protections that may reduce a remortgage:
- 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 can’t cost more than £75 over 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.
“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.
“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.
“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. This is only a problem if you are asked to get a secured loan, see below.
“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 last year you had a couple of mortgage rejections.
“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 there isn’t enough equity you don’t have to carry on for a 6th year.
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.
The dreaded secure loan clause
From 2019 this has been an increasing problem.
People who have taken out an IVA under the 2014 or 2016 Protocols, 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 – see this case where a reader was told he had to get a 15 year secured loan at 19%.
Most older IVAs do not have this clause – they just refer to a “remortgage”, which 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 have grounds for challenging this because it wasn’t explained properly to you. Read IVAs and secured loans – how to complain which looks at this subject.
Are you thinking about an IVA?
If you looking at an IVA, you need to 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.
Also read the bit about “secured loans” above – 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.
Do not enter an IVA with a firm that is not prepared to explain in detail to you what will happen at the end. Assurances that it will be fine or you won’t have to take a secured loan are worth NOTHING unless the firm will put them in writing.
Updated January 2022