IVAs for Homeowners
This type of IVA is specific to people who own property.
It relates to any IVA where the applicant holds ownership of a property, either in part of in full. It also relates to properties that are mortgaged or unencumbered.
This type of IVA still benefits from all the standard terms and conditions of an IVA, such as legal protection from creditors and a potential debt write-off.
But, in addition, it includes a particular clause within the IVA proposal to address the possibility that equity might need to be released into the IVA for the benefit of the IVA creditors.
The equity clause is introduced into the proposal specifically to detail exactly how any equity held within a property will be treated under the terms of the IVA.
The clause, itself, seeks to remove any ambiguity relating to the introduction of equity by the applicant, and ensure that the applicant agrees to these undertakings before the IVA begins.
The IVA Equity Clause
This is a brief outline of what the IVA equity clause is trying to achieve.
Creditors will expect people who own property to commit to the principle of remortgaging their property at some stage during their IVA, normally towards the middle of the 5th year.
There is an obligation to have the property valued by an independent source, to establish whether there is any equity within the property.
If the IVA applicant’s share of the equity is less than £5,000 then the IVA equity clause will not be triggered and the IVA will terminate at the previously agreed term of, normally, 5 years.
If the IVA applicant’s share is greater than £5,000 then the equity clause will be triggered and the applicant will have to try to release a proportion of their equity in to the IVA.
There is a predetermined limit to the amount of equity that must, if possible, be released. This is normally 85% of the overall value of the property, ensuring that there will be a minimum of 15% of equity to be retained.
There are also other factors that limit creditors’ expectations.
- The extra cost of the remortgage, i.e. the increase above your current mortgage cost, must not exceed 50% of the current IVA contributions.
- You will not be expected to repay more than your original debt, excluding statutory interest.
- The repayment term does not extend beyond the latter of either your retirement age or the existing mortgage term.
- The costs of the remortgage, including any redemption penalties, will be deducted from the funds to be introduced into the IVA.
- If the extra cost of the remortgage is such that the affordability of your IVA contribution falls below £50, the IVA will be concluded with the introduction of the released funds.
In the event that a remortgage cannot be obtained, for whatever reason, then the Insolvency Practitioner has the discretion to accept either:
- The introduction of 3rd party funds, equal to 85% of the applicant’s interest in the property.
- 12 additional monthly contributions, limited to 85% of the applicant’s interest in the property.
Understanding the equity clause
The equity clause details the obligations that must be undertaken by an IVA applicant when they enter an IVA, with respect to their property and any equity held within it.
It should be noted from the beginning that only equity belonging to the IVA applicant can be considered as being relevant to the IVA process.
This means that if you own a property jointly with someone else, your creditors cannot lay claim to your co-owners share of the equity.
In most circumstances, the equity clause will relate to a single property i.e. the home of the applicant, but it will also be applied to situations where an IVA applicant has multiple properties.
The clause contains rules that stipulate what actions must be undertaken in order to release equity into the IVA.
These rules are often misunderstood so, if you own, or part own a property, and you're considering entering into an IVA, you should ensure you understand how an IVA will affect the equity in your home before you commit yourself.
Talk to us
If you co-own a property and you are concerned about the equity release clause, you should contact the team here at IVAorg
We have years of experience in helping people come to understand the equity clause and how it will be applied to their personal circumstances.
Please call our helpline on 0800 856 8569 to arrange a free consultation with one of our IVA consultants, now.