Will the equity in my house affect my IVA?
The issue of equity in an IVA is a very important one, not least because when there's a property involved in an IVA, it alters the terms under which the creditors will accept the proposal.
In order to fully appreciate the impact that equity might have on an IVA we must, first, establish what is meant by equity.
Here are the 3 phrases most commonly used when discussing equity and the meaning associated to each.
- Negative equity. Where a property's resale value is lower than the amount of borrowings secured against it.
- Positive equity. Where a property's resale value is higher than the amount of borrowings secured against it
- Releasable equity. Used to describe the equity that can be accessed, or released, via secured lending.
If you are in a negative equity position, your property is worth less that the amount borrowed against it.
People entering into an IVA whilst their property is in negative equity, need to be aware that potential future equity will not be ruled out from being included in the IVA.
Just because equity does not exists at the outset of the IVA, on the date of the Creditors' Meeting, doesn't mean creditors will forego their right to access any future releasable equity that may develop during the term of the IVA.
Consequently, creditors will demand a property valuation to be submitted towards the end of the IVA's 4th year, to re-evaluate the equity before the IVA concludes.
PLEASE NOTE: If your property is still in negative equity when the equity is re-assessed, your IVA will complete after just 5 years.
If your property is in a positive equity position, the value of the property is greater than the money you have borrowed against it.
This means that you may be required to release some of the equity from your property under your IVA obligations.
However, under the terms of the IVA, creditors can only expect 'releasable equity' to be made available to them. Read the next section to establish how you will be expected to honour the obligations placed on you by your IVA.
It is important to note straight away that not all positive equity is releasable equity.
A secured lender will always try to protect themselves from lending money to someone who can't afford to repay the loan.
They do this by restricting the levels of money they will lend to a homeowner, represented as a percentage of the value of the property, and based largely on the homeowners credit rating.
This safeguard is known as a the Loan To Value ratio or LTV, which is the ratio between a property's value and the maximum loan the lender will secure against it.
Lenders adjust this ratio to fit the credit worthiness of the loan applicant.
The higher the LTV the more creditworthy the client and, equally, the lower the LTV the less creditworthy.
The rationale behind a LTV ratio is simply to protect a lender, as any loan is set to a percentage of the market value of that particular property.
LTVs can be anything between 50% - 100%, depending of the credit rating of the homeowner. This security gives the lender confidence that, even in a forced sale situation, they are likely to recover the full loan.
Due to the damaged credit rating caused by the IVA itself, the LTV rates for people in an IVA are very low.
As of early 2013 the best rates available for people in an IVA were set to 50% LTV, meaning the maximum secured loan available is set at just half the property's value.
For most people this will mean getting a secured loan to release equity whilst in an IVA is virtually impossible.
PLEASE NOTE: As part of the IVA protocol, an IVA which includes a property containing positive equity of £5,000 or more, that cannot be released at the appropriate time during the IVA, will be subject to an extension of 12 months to the IVA's repayments term. These extra payments will be taken in lieu of the unreleased equity.
You will be required to re-assess the value in your home at the end of the 4th year of your IVA.
If your property has:
- Negative equity, your IVA will complete after 5 years, with no remortgage or IVA extension being required.
- Positive equity below £5,000, your IVA will complete after 5 years, with no remortgage or IVA extension being required.
- Positive equity above £5,000, you are obliged to try and release equity up to 85% of the property's value or, if unable to release the equity, face an extension of 12 months to the IVA's repayments term.
Another point to consider with property in an IVA is a property under joint ownership.
If the person subject to the IVA is a joint owner in a property, and the other party is not in the IVA, their share of the equity will not be affected. But they will, however, need to consent to a re-mortgage at the end of the IVA if applicable.
To have a chat about the issues discussed above call 0800 088 7503 to speak to one of our specialist IVA advisers.
Or complete this form and someone will call you at your preferred time.