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What happens if you can’t remortgage during your IVA?

Posted 20 September 2016

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Find out what you can do if you can’t release equity from your property.

When you’re on an Individual Voluntary Arrangement (IVA), if you are a homeowner you’ll usually have to attempt to release equity from your property towards the end of your plan. You do this by remortgaging your home and the equity you release then goes into your IVA. This will go towards paying off your unsecured debts.

But what will happen if you can’t remortgage when you’re on an IVA? Will this affect your debt solution and what can you do about it? Let’s take a look at what could happen if you can’t remortgage your property and what it means for you.


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Why remortgage?

If you’re a homeowner on an Individual Voluntary Arrangement (IVA), there are rules around what happens with your property. You’ll usually have to attempt to remortgage your property towards the end of your solution. This is to release equity from your home, which you then pay into your IVA.

This will typically happen around six months before the end of your debt solution. Your Insolvency Practitioner (IP) should get in touch with you to tell you when you need to do this.

You’ll need an up-to-date valuation of your property so you know how much it’s worth now – your IP will get this for you. If you don’t agree with their valuation, you can get your own from an estate agent and then send this to your IP. Once you’ve got this, you can work out if you’ll need to remortgage to release equity. Your IP will work this out based on 85% of your property’s value – because you’re never expected to release more than 85% of the value of your home. So if your home was valued at £100,000, your figure is £85,000.

This figure will then help you work out if there’s any equity in your property and whether you’ll need to pay any of it into the IVA. Equity is the difference between what your property is worth and the remaining debt you have on it. You’ll need to subtract your mortgage and any secured debts you have from the figure of 85% of your home’s value. If this sounds confusing, don’t worry – your IP will help with this. And if you own a property jointly, it’s just your share of the equity you’ll look at.

If your equity in the property is less than £5,000, you won’t have to try and remortgage to release it. Your IVA will continue as planned and finish at the end of the original term. But if you’ve got more than £5,000 in equity, you’ll need to attempt to remortgage.

What about your credit history?

As you’re on an Individual Voluntary Arrangement (IVA), you’ll have a damaged credit history. You’ll have a negative credit history with all debt solutions because you’re changing your contractual payments in some way.

When you start an IVA, the damage to your credit history will last for at least six years. During this time, you might find it harder to borrow. This is because creditors can see the problems on your credit history and some of them may reject your application as a result.

Because of this, you are likely to have problems trying to get your remortgage during your IVA. But don’t worry – if your application for a remortgage is rejected, you won’t have to release equity from your property anymore and you’ll only need to attempt to do this once from whichever mortgage lender or broker you choose. However, this will have an effect on your IVA – we’ll explain how below.

If you are accepted for a remortgage deal but your monthly payments would increase by more than 50% of your IVA payment, you wouldn’t have to accept this. This is because you should be better off financially after your debt solution, not in the same situation. Instead, you might be able to release a lower amount of equity so your mortgage payments don’t increase by too much.

You also won’t be expected to remortgage if it meant that you’d still be paying it back past your state retirement age (unless you’re already in this situation with your current mortgage). And as we explained above, you might instead be expected to just release some of the equity in your property if releasing the entire available amount would mean your mortgage lasted too long.

What are your options?

Don’t worry if you can’t get a remortgage during your Individual Voluntary Arrangement (IVA). It doesn’t mean your debt solution will fail – you have a couple of options about what you can do next.

If a third party can afford to pay a lump sum that’s worth the amount you were expected to pay into your IVA, your debt solution will still end as planned. So if a parent, your partner or another relative can afford to pay in the value of your equity, your IVA will last the term you agreed at the start of the solution.

But if you don’t have someone who can afford to do this, your IVA will be extended by up to 12 months instead.

Speak to your IP about your options if you’re worried about how this will affect your IVA and your financial status. And if you’re thinking about starting an IVA to deal with your debt problems, you can get in touch with our debt advisors using any of the options on the left.


by Emily Bancroft

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