What happens if I cannot get a mortgage to release equity at the end of my IVA?

21 October 2010
James Falla (about the author)

If you are a home owner and are in an IVA, you will normally have to release equity from your property. We investigate what happens if you cannot get a mortgage and equity release is not possible.

Homeowners often use an IVA (individual voluntary arrangement) if they are struggling to pay their unsecured debts. This is because once an IVA is in place the property is legally protected from any further action by the creditors.

Most importantly, creditors are not allowed to take out a charging order against the property which would in effect make the debt secured.  

However, as a homeowner, one of the things that you will have to agree to if you want to start an IVA is to release any available equity from your property to increase the amount that you pay back to your creditors.

New valuation

Generally you will be asked to release equity in the final (fifth) year of your IVA.

You will first have to get a new valuation of your property. If this valuation shows that there is equity available, you must investigate whether remortgaging your home to release this possible.

Because you are already in an IVA, your credit rating will be poor and this will count against you when trying to remortgage.

Your IP (insolvency practitioner) will be able to recommend a mortgage broker who will help.

New mortgage payments must be affordable

Of course if you re-mortgage, your monthly mortgage payments will increase.

Remember, you will be able to afford this because you will no longer have to maintain your IVA payments.

However, as a general rule, you will never have to increase mortgage costs by more than 50% of your current IVA payment. In this way, the increased mortgage payment will always be affordable.

The problem in the current economic environment is that it is not easy to get a mortgage.

Mortgage not available

With house prices remaining static or actually falling, it is possible that there will be very little or no equity in your property at the end of your IVA.

In addition, most banks will not lend anything over 80 percent of the value of the property. So even if there is some equity in your home, it may be impossible to release this.

If you find yourself in this situation, your IVA will not fail. Most IVA agreements do not require you to release a fixed amount of equity from your home. Rather they will state that equity must be released if available.

Extended IVA payments

However, because you have been unable to release any equity, your creditors will normally ask you to extend your IVA payments for another twelve months.

Initially you may feel reluctant to extend your IVA payments. However, remember that by doing this, you will not have to release any equity from your home. After the end of the additional payments, you will be debt free.

It is important to remember that as a home owner, if you want to do an IVA, you will be asked to release equity from your property. This will normally be in the final year of your agreement.

If at the end of your IVA, you find that there is no equity in your property or you are unable to get a mortgage to release equity, your IVA will not fail. You will however normally be asked to extend your payments for a further 12 months.

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