A reader asked this in a comment, but it needs a whole article to tell the story properly:
“We are currently 4.5 years into an IVA, we have got to raise £15,000 through remortgage. We have been told from the start to not worry as there is little to no chance of us being offered it, however we have been offered a £15,000 loan over 15 years and paying back £45,000.
I can’t believe this is an acceptable arrangement as we are now not going to be “debt free” for another 15 years. Is there anything we can do about this?
Our IP says he may be able to offer our creditors extra 2 years in the IVA as a solution but that they may reject this offer. This just sounds ridiculous as we would have been better off selling the house in the beginning or going bankrupt. “
That’s 18.8% interest
It would be interesting to know how the secured loan lender set that horrible rate. Steve’s monthly IVA payments are £550 and his mortgage lasts for 15 years. Any equity release can’t cost more than half the monthly IVA payments so it looks to me as though the lender basically set those as the repayment terms.
In other words, the borrower is being charged as much as is possible for as long as is possible. Hard to equate that with treating customers fairly!
Most secured loan rates are also variable, so who knows what it would go up to in a few years?
No “secured loan clause”
Steve asked if there was anything he could do about having to take this loan. I suggested he checked his IVA terms and, as expected, these only referred to a “remortgage” not to a “secured loan”.
From this point on it seemed likely to me that if Steve just kept saying he was never told about a secured loan at the start and the wording doesn’t mention a secured loan, he was probably going to be able to reject this loan and just make 12 more IVA monthly payments instead.
During the next two months, Steve says his IP suggested at various times that:
- the secured loan rate was rather high but his hands were tied;
- the creditors might be prepared to accept 2 years of extra payments instead of one, but he couldn’t guarantee it;
- the term “remortgage” was always understood to include getting a secured loan;
- the reference in the IVA terms to “third party funds” meant a secured loan;
- Steve should try to remortgage with a 22 year term which would take him to state retirement age instead of 15 years; and
- the secured loan payments could be reduced by opting for a 22 year loan (true, but it would have pushed up the overall cost considerably).
Steve did try to remortgage with a 22 year term – unsurprisingly the high street lenders still said No.
In the end the IP gave in and proposed the standard 12 month extension variation. This has now been accepted by his creditors.
This has been an extremely stressful two months for Steve and his wife. I feel they were put under an unreasonable amount of pressure to agree to an expensive secured loan from a sub-prime lender when there was no legal obligation for them to do this. Steve’s verdict was “We honestly thought our IP was on our side. We would have probably rolled over if it wasn’t for you.”
What about recent IVAs with the secured loan clause?
This case doesn’t bode well for people who are starting IVAs now using the standard 2014 IVA Protocol, which says “Remortgage includes other secured lending such as a secured loan.”
The IVA Standing Committee has provided the following explanation about the new clause:
“The idea is NOT for a lengthy secured loan to be obtained. Debtors will be required to attempt to release the equity and will be advised to take advice from an independent financial adviser about the most appropriate product and repayment term.
There are safeguards in the protocol to stop the debtor from taking on unaffordable borrowing. These include (1) that the cost of the refinancing shall not exceed 50 percent of the debtor’s contribution at the date the refinance position is reviewed (2) that the refinance term does not exceed the later of the debtor’s state retirement age or the existing mortgage term (3) that the debtor is to obtain independent financial advice.”
What about someone who had an identical IVA and financial situation to Steve’s, with the new secured loan clause included – let’s call this person Sonia. Would Sonia have had to take out this secured loan? What is Sonia supposed to say to her IP who is pointing to the secured loan clause in her agreement? If her IP insists and Sonia tries to go to court about this, surely what matters is what she has signed, not how the IVA Standing Committee thought it would be used?
Would the so-called safeguards help Sonia? No. The proposed loan was less than half of the IVA payment (just) and it didn’t exceed the given time limits. I have no idea how taking independent financial advice is supposed to help matters – what is an IFA supposed to say apart from “Of course it’s an appalling loan, but that is what you have agreed to.”
Let’s look at a couple of arguments put forward for the new secured loan clause and see if they are reasonable.
“A secured loan could be better for the debtor”
It is possible to construct cases where a secured loan is cheaper than a remortgage. If Steve had had a base rate + 0.5% mortgage, then even the secured loan proposed would have been cheaper than remortgaging. But Steve’s mortgage wasn’t at one of these wonderful rates, and neither are the mortgages of most people who are in an IVA.
There was no need to introduce this clause to cover the small number of people who might benefit from a secured loan – any IP could have simply proposed to the creditors a variation saying they would get their equity release but the debtor preferred a secured loan to a remortgage.
“It’s just for a couple of years then the debtor can remortgage”
I think this is dangerous advice to give. Who knows what house prices, the mortgage market or the debtor’s situation will be in a couple of years? Any of these could prevent the debtor being able to remortgage at a reasonable rate, in which case they will be stuck with the expensive secured loan.
I have two conclusions to draw from Steve’s sorry saga.
First, anyone who doesn’t have a secured loan clause in their IVA should strongly object if their IP tells them they have to take out a secured loan.
Secondly, it’s really not good enough for the IVA Standing Committee to say “The idea is NOT for a lengthy secured loan to be obtained“. It has to be much clearer about exactly what secured loan a debtor may be required to take out. Steve’s loan provides the acid test: does the IVA Standing Committee think the option presented to Steve was reasonable?
- If Yes, then this needs to be highlighted to everyone considering taking out an IVA who has a house. Not as in “you may have to release equity which could include a secured loan but there are lots of safeguards” but very explicitly, quoting possible loans that the debtor may have to accept. I think Steve’s reaction will then be common “This just sounds ridiculous as we would have been better off selling the house in the beginning or going bankrupt.”
- If No, then the IVA wording needs to be changed to explain under what circumstances a secured loan will be required and what additional limits there will be on the interest rate and / or term of the loan that would rule out this sort of loan.
Update – July 2016 – a new version of the Protocol has just been published. I had hoped this would help, but it hasn’t clarified what a “fair” secured loan would look like – see 2016 IVA Protocol for details.