A question we are regularly asked when talking to clients about an IVA is What is Equity?
In simple terms, equity is the name given to describe the value of money that a person would potentially be left holding if they were to sell their property and settle all the outstanding loans and charges borrowed against it, or…
- Property Value – (Mortgage + Secured Loan) = Equity
If you own or have shared ownership of a property and are struggling with your unsecured debt repayments, it is extremely important that you to establish exactly what would happen to your equity.
And in the event that you needed to take some sort of formal action, such as petitioning for bankruptcy or entering into an IVA, you need to be warned that these two solutions will treat the equity in your property in two completely different ways.
So, to help you discover the difference, we have some simple illustrations below, giving you an insight into the way you could expect your equity to be calculated, and what you could expect to happen to that equity, firstly in a bankruptcy, and secondly in an IVA.
To calculate how much equity there is within a property, use the examples below as a guide.
Please note: In either solution, be it bankruptcy or an IVA, when a property is owned by more than one person, it is only the equity owned by the debtor that will be taken in to account. Any equity owned by the co-owner(s) will be deducted from the equations below, thus not forming any part of either solution.
For a clearer picture as to how equity within a jointly owned property will be taken into account, please call 0800 088 7503.
Equity Release In A Bankruptcy.
In a bankruptcy, you would be expected to surrender your property to the Official Receiver. The Official Receiver would then sell the property to release the equity for the benefit of your creditors.
Property’s market value = £100,000.00
Minus the borrowings against the property = £52,000.00
Gives a total equity release in bankruptcy of = £48,000.00
The total equity is the amount of money remaining after the secured borrowings against the property, which would typically be your outstanding mortgage and any secured home loans, have been paid off.
In a bankruptcy, you would be expected to surrender your property to the Official Receiver. The Official Receiver would then sell the property to release all of the equity held in the property, then take 100% of the debtor’s equity for the benefit of their creditors.
Any money still remaining from the sale of the property, after the mortgage had been repaid, your unsecured debts had been paid back in full and after the bankruptcy costs had been deducted, would belong to you.
Equity Release In An IVA.
In an IVA you would only be required to release what equity was available to you via a re-mortgage.
To calculate the element of releasable equity via a re-mortgage we’ll work on a typical ‘Loan To Value’ (LTV) of 75% of the property , though this can vary depending on the economic climate at the time of writing.
Property’s market value = £100,000.00
Multiplied by 75% LTV = £75,000.00
Minus the borrowings against the property = £52,000.00
Giving a total releasable equity in an IVA of = £23,000.00
The proportion of releasable equity owned by the debtor will the be calculate and this will be the amount of money that will need to be introduced into the IVA.
As can be seen from these simple illustrations, how each solution treats the equity is very different, and advice should be taken to ensure you are completely aware of how your equity will be treated under each solution.
But, in simple terms, under the IVA example, the money raised via a re-mortgage would leave the IVA applicant with a substantial amount of equity left in his property, yet debt free after the IVA had completed, whereas the bankruptcy example would take all the available equity, pay it to creditors and leave the bankrupt without a home.
So if you are experiencing financial problems, and you think that the equity in your home may be part of the solution, call 0800 088 7503 where one of our specialist IVA advisers is waiting to help you.
Or you can download any of our free IVA guides, specially designed to help answer your questions.
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