A reader asked:
I moved in with my parents into their council house several years ago and we are looking into the right to buy scheme. We received the paperwork and it stated that you are not entitled to the right to buy if you owe money to creditors.
Five years ago I lost my job and had a relationship breakup and unfortunately got into debt. Two accounts were defaulted and I went into a payment arrangement with them. I have maintained the payment agreements and gradually increased them but still owe quite a bit (£5,000) on the credit card.
I am back in work now. I have been offered full and final settlements – will this mean my debts are paid in full and I can then go ahead with the council house purchase? Or will I need to pay the outstanding debts in full for this to be classed as ‘owing no money to creditors’?
I know that getting a mortgage is still going to be an issue however :(
The Right to Buy provisions about debt
I have highlighted the relevant part of the Right To Buy rules (if you are looking at your council’s information sheet, the layout may vary but it should say much the same):
This may sound as though it applies to you – after all you have made an arrangement with your creditors and you do still owe them money. However the good news is that it doesn’t!
The type of arrangement this paragraph is referring to is is an Individual Voluntary Arrangement (IVA) which is a form of insolvency, like bankruptcy. You have an informal arrangement with your creditors – the name for this sort of arrangement is a Debt Management Plan (DMP). Your current DMP and debts in it wouldn’t stop you being able to use the Right To Buy with your parents.
If you are wondering why it matters if you are in an IVA but not a DMP, it’s because buying a house means that you are acquiring an asset, and that would cause all sorts of legal problems if you were in a form of insolvency such as an IVA, so the whole option is being ruled out. These sorts of legal issues just don’t arise with a DMP.
Getting a mortgage
But even though these debts won’t prevent you from exercising your Right to Buy, they are very likely to mean it’s very hard to get a mortgage offer. This is for two reasons:
- the defaults on your debts mean that your credit record won’t be good, and
- you still owe money, which will worry a lender.
Both of these factors will make it harder for you to get a mortgage – you may find Can I get a mortgage when I am in a DMP? useful reading.
Using a full and final settlement to clear the debts is probably a very good way forward for you – it solves the second problem completely and by changing the balance owed to zero, your credit record will also start to improve.
As the defaults will have been a long while ago (at least they should be – if they are not at least four years ago have a look at whether the default date is correct and if it isn’t, get it changed) this may well be enough for you to get a mortgage later this year. With any problems on your credit file at all, it’s always worthwhile going through a broker, not direct to a lender.
Be sure a mortgage is right for you
It may feel like a no brainer to buy the house at such a huge discount, but three things to think about:
- if you have more work problems it is much easier to get help with rent through Housing Benefit / Universal Credit than it is to get help with mortgage payments;
- investigate in detail any service charge you may have to pay the council – people can find themselves landed with surprisingly large bills after a few years that they can’t afford;
- think what will happen if you decide you want to move out, perhaps you have a new partner or your job moves. At the moment your parents have a secure home for life.