Is a mortgage included in an IVA?
An IVA can only include unsecured debts, such as credit cards, overdrafts, bank loans, payday loans, store cards, catalogues, and unpaid utility bills.
Which, unfortunately, means an IVA can't include secured debts, such as a mortgage or a secured loan.
Because of there secured status, mortgage loans are referred to as priority debts and, for this reason, an IVA gives mortgage payments special priority within your monthly expenditure budget. This is to ensure you have the necessary funds to pay maintain your mortgage payments throughout your IVA.
So, rather than being left to struggle with the affordability of your debts, the IVA allows you to prioritise your mortgage payments ahead of those to your unsecured debts, significantly reducing the risk of you losing your home.
Dealing with negative equity
In most IVA cases the applicant is very keen to protect their home against the threat of repossession, however, that's not always the case.
There are occasions where, due to any of a number of factors, such as a property with negative equity, where the intention isn't to protect the property at all but, rather, to remove the liabilities owning the property creates.
To make this happen, a process of converting the secured loan into an unsecured loan needs to take place and that normally starts with a repossession.
Types of repossession
By definition, secured debts, such as mortgages or secured loans, provide security to the lender, usually in the form of a charge held against the purchased asset.
In the event of a severe payment default on a secured loan, the loan can be recalled by the lender and the secured asset seized. This action is known as 'repossession'.
Repossession can be brought about in two different way, either involuntarily or voluntarily.
- Involuntary repossession follows legal action by the lender to take control over the asset so it can be sold to settle the outstanding debts.
- Voluntary repossession comes as a result of the borrower surrendering the secured asset to the lender without legal action being required.
Once repossession has taken place, the secured lender will undertake the process of selling the property to recover as much of the outstanding debt as possible.
If there is a surplus, this will be passed to the original owner, once all the costs of sale have been deducted but, if there is a loss, then a shortfall is created.
What is a mortgage shortfall
When a property has a sale value lower than the amount of money owed to the mortgage secured against it, it's said to be in negative equity.
The debt created when a property in negative equity is sold for less than the outstanding mortgage secured against it is known as a mortgage shortfall.
Because a mortgage shortfall is created by selling the asset to which the loan had been secured, the shortfall becomes detached from the security and reverts to an unsecured loan.
Mortgage shortfalls in an IVA
As a result, once the negative equity has been crystallised to created the mortgage shortfall it possible to include the mortgage shortfall in an IVA, along side all the other unsecured debts.
This means that, once the IVA has been accepted by your creditors, your liability to that debt is removed.
The mortgage lender will instead receive their share of your IVA's dividend as will all your other creditors and then, after the IVA has completed successfully, any outstanding balance to the mortgage shortfall will be legally written off.