bankruptcyinstruction

What is the equity release clause in an IVA?

Under an IVA you will be expected to propose that, in the latter part of the agreement term, you will release any share of your interest in the equity of the property towards repaying your debt if it is practical to do so i.e. there's enough equity to obtain a remortgage and there are no known future affordability issues.

The way it works is this: you propose that in the 4th or final year of the IVA you will obtain a market valuation of the property and redemption statements on the mortgage and any further secured charges against the property. Creditors and Insolvency Practitioners realise that it's next to impossible to get a 90-100% remortgage for a debtor in a IVA, so they will settle on a remortgage of up to 85% of the property's value.

If the charges against the property at revaluation time are therefore less than 85% of its value, you will take the remortgage offer to release the equity into the IVA, which will consequently reduce your payments to your IVA. Creditors do not normally wish to see your increased mortgage payments at higher than 60% of the amount you are paying into the IVA.

If you cannot get a remortgage offer at that time, but equity in the property has risen, then creditors may instead agree that the IVA continues for at most one extra year in lieu of release of equity from the property. They are only likely to agree to this though if the amount of equity release being forgone is similar to what one year's extra IVA payments will amount to.

If the amount of equity you have in the property is more than the amount of your unsecured debts at the outset, you cannot enter an IVA; the creditors would simply expect you to remortgage your house to pay off the unsecured debts in full.

If the property is jointly owned with significant equity but only you are subject to the IVA, creditors will expect to see only your share of the equity – your partner's share remains untouched.

What happens to my home in a bankruptcy?

Under bankruptcy, if you own your house, either solely or jointly, your personal ownership (interest) will pass to the Official Receiver (OR) or Trustee. While this doesn't mean you will be evicted and out on the streets straight away, it does mean that unless you can afford to buy your interest back the house will have to be sold, this will be by court order if you do not agree to do it voluntarily. You will be given one year's grace during which time you can continue to live in your house as long as you continue to pay the mortgage. After that year is over, either you buy back the Official Receiver's interest or the house will have to be sold. Normally your spouse, partner or family member will be able to buy back your interest from the OR.

Will I be able to obtain a mortgage (buy a house) whilst I am in an IVA?

Yes, people in an IVA can take out a mortgage and contary to popular belief an IVA will not necessarily have a massive adverse affect on your application. If you are considering taking out a mortgage whilst in an IVA there are some pitfalls to watch out for and a few points to remember. First and foremost; you will need the permission of your Insolvency Practitioner (IP).

Your credit worthiness

It is unlikely for you to be able to walk into any high street bank and obtain a mortgage, you will need to seek the advice of a mortgage broker who specialises in adverse credit lending. This does not automatically mean that you will have to pay higher rates than a high street mortgage, although the mortgage products and therefore rates available to you will be based on your wants, needs and circumstances. You will be unlikely to obtain a mortgage if your IVA has failed (which is shown on your credit file).

Your deposit & other fees

It is reasonable to assume that people in an IVA do not have large levels of savings, and therefore putting down a deposit or paying fees which can not be included into the mortgage could be difficult. This does not mean that it is impossible. It may be that a family member or a friend is able to help by lending or giving you the deposit.

This is acceptable, in most cases, but it can cause complications. The person providing the deposit should consider protecting their money from creditors, through a Deed of Trust, (if a relative or friend lent you the deposit to buy a property. The very fact that a deposit was paid builds equity into a property, and adds to a possible rise in value, the opportunities for creditors to extract extra funds through a re-mortgage are increased.)

To reduce some of this risk it may be possible to protect any deposit from a third party through a Deed of Trust. This is a legal document drawn up to protect any money provided by a third party from the creditors. The other fees to consider are stamp duty (if the house price exceeds certain limits), solicitor's fees, valuation fee, the brokers completion fee and some mortgage products require a lenders arrangement fee.

The monthly repayments

Repaying a mortgage in an IVA is acceptable, as long as it does not diminish the regular monthly repayments into your IVA. What this means is; if your IVA repayment is £350 per month and your accommodation costs are currently £700 per month, it should be acceptable to creditors for you to purchase a property as long as it costs no more than the £700 per month you currently pay, and therefore does not reduce the amount you are able to offer towards your IVA. If however, the cost of the mortgage was £750 per month, then your ability to pay £350 per month into your IVA would be reduced by £50 per month and would probably not be acceptable to creditors.

Your Equity
The length of an IVA is usually five years, if during that time you buy a property, even if it's part way through, there is a strong chance that the property will increase in value. Creditors would want any added value, i.e. equity, to be considered at the end of the IVA, but only if the total debt was not repaid in full and there was still a shortfall owed.

The ratio to be considered when working out how much equity can be released in a re-mortgage at the end of an IVA is usually 85% of the loan to value (LTV) figure. What this means is that if a property is now valued at £165,000, the maximum amount a lender would be prepared to lend against that property would usually be 85% i.e. £140,250. If that property has an outstanding mortgage of £100,000 the amount of releasable equity would be equivalent to the difference between the (outstanding mortgage) £100,000 and (85%) £140,250, a balance of £40,250, which could then be used to offset any shortfall due to creditors at the end of the IVA.

Will I be able to remortgage during my IVA?

You will be expected to remortgage as previously mentioned for the equity release clause, however there are occasions when it may be possible to remortgage before this time.

Remortgaging to reach a full and final settlement of your IVA.

This is not unusual and in most cases will be agreed by your IP and creditors if you are able to pay off the entirety of the original debt or a significant amount more than the original proposal.

Remortgaging to stop a repossession during your IVA.

This is not unheard of, but in most cases it will require a fair amount of negotiation, and explanations to your IP and for your creditors, as in most cases this will mean increasing your debts and possibly reducing your payments into your IVA. Being in the situation where you are facing repossession of your home, means you possibly have affordability issues that need to be revisited and re-addressed with your IP as soon as you become aware of them.

Missing mortgage payments puts you in danger of losing your home and in danger of failing your IVA, if you find yourself in the situation where your mortgage provider is threatening repossession or seeking a court order to repossess, speak to a specialist mortgage broker who is able to advise immediately.

How do I get a mortgage or remortgage during my IVA and what should I expect.
Remember, there is life after IVAs and bankruptcies. Contact a reputable, Financial Services Authority (FSA) authorised and regulated mortgage broker to discuss your options. There are two types of mortgage brokers; those able to offer full advice and those only able to conduct non advised sales. It is important that you seek and speak to a specialist mortgage broker, who is able to offer you full advice. The mortgage broker should take you through a full fact find which will include details regarding your personal details (name address, contact numbers etc.), your employment details, your income details, your expenditure details, your credit history (including a full credit search), your current mortgage details, the mortgage product features you are looking for, and your attitude to risk.

The mortgage broker will then search through their lenders and find all the products that match the criteria which corresponds with the details in your fact find and the results of your credit search report. They will then make their recommendations for the best product to suit you.

After speaking to a mortgage advisor you will be sent an Initial Disclosure Document (IDD) and once a product has been recommended you will be sent a Key Facts Illustration (KFI). The KFI will tell you, amongst other things, what rate you have been quoted and what your monthly payments will be. You should also receive a suitability letter (although this is not currently a document 'required by the FSA' ) which will detail the reasons why the mortgage product was recommended.

The initial advice, your IDD, KFI and Suitability letter are usually given free of charge.

The service you receive from mortgage product recommendation to mortgage completion is dependent on the mortgage broker you decide to go with. Make sure you select a mortgage broker that has experience in dealing with IVAs, adverse credit lending and packaging mortgage products to completion.

Referred from: (http://www.bankruptcyhelp.org.uk/)