Yes, people in an IVA can take out a mortgage. However, there are few points to remember if you are considering taking out a mortgage whilst in an IVA and would like to avoid some of the pitfalls.
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1. Credit worthiness
An obvious stumbling block for people trying to buy a property whilst in an IVA is their credit worthiness. The very fact that someone is in an IVA means their credit score will be damaged as there will be a reference to the IVA on their credit report. This, therefore, means that any potential lender will be made aware of it when they do a credit check as part of the mortgage application.
This does not mean that getting a mortgage is completely out of the question, however, it is more likely that, as a result of the poor credit score, the only lenders prepared to offer a mortgage will be a specialist “sub-prime” lender. And it stands to reason that their rates may be slightly higher than high street lenders offer. The “sub prime” market is still competitive and, in reality, the rates charged to clients with credit history problems are only slightly higher than the “prime market”.
This is because a mortgage is a secured loan and, by definition, the loan is secured against the property, offering the lender an extra level of security.
2. Your deposit
It is reasonable to assume that people in an IVA don’t have large levels of savings. Therefore, putting down a deposit of some description could prove to be extremely difficult, not to mention trying to explain to your insolvency practitioner how you accumulated the money in the first place.
This does not mean that it is impossible. It may be that a family member or a friend is able to help by either lending or gifting the deposit as 3rd party funds. This is a completely acceptable option, but it can cause complications within the IVA with regard to equity ownership. Therefore, the person providing the deposit should consider protecting their investment through a Deed of Trust. This is a legal document drawn up by a solicitor and can be used to ‘ring fence’ or protect money provided by the 3rd party for the duration of the IVA against a claim from the IVA’s creditors.
3. The monthly repayments
Repaying a mortgage in an IVA is acceptable, as long as it does not alter (i.e. diminish) the regular monthly repayments into your IVA.
What this means is that if your IVA repayment is, let’s say, £450 per month and your accommodation costs are currently £1,000 per month, it should be acceptable for you to purchase a property so long as it costs no more than the £1,000 per month you currently expend. If this can be achieved, there would be no impact on the amount you pay towards your IVA. If, however, the cost of the new mortgage was £1,100 per month, then your ability to pay your IVA payments would be impacted by £100. The payments of £450 to your IVA would need to be reduced to £350, which would probably not be acceptable to creditors.
4.Your Equity
The length of an IVA is usually five years, if during that time you buy a property, even though the IVA is part way through, there’s a chance the property will increase in value. Creditors would want any added value, i.e. equity, to be considered as part of the conclusion to the IVA. They could lay claim to some element of the releasable equity in the new property, even though it did not form part of the original IVA proposal. However, they could only make a claim if there was a portion of the original debt still left unpaid by the end of the IVA.
The ratio to be considered when working out how much equity can be released in a re-mortgage at the end of an IVA, is usually 75% of the “loan to value” figure.
What this means is that if a property is currently valued at £100,000, the maximum amount a lender would be prepared to lend against that property would be 75% i.e. £75,000. If the property has an outstanding mortgage of £60,000 the amount of releasable equity would be equivalent to the difference between the £60,000 and £75,000, a balance of £15,000, which could then be used to offset any shortfall due to creditors at the end of the IVA.
If, however, the £15,000 had been introduced by a 3rd party’s deposit and had been protected through a Deed of Trust, the creditors would not be able to lay claim to it as it would, in the eyes of the law, still belong to the 3rd party.
To summarise, unless the need to buy a house whilst in an IVA is essential, it is probably better to continue living in rented accommodation for the duration of the IVA.
Technically buying a property is possible, but practically, it may be better to clear all your debts through the IVA first and only after the IVA is completed take on the responsibility of a mortgage
If, after reading the points above, you still have unanswered questions call our specialist advisers on 0800 088 7503 or visit My IVA Adviser
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