The ‘equity clause’ in IVA – all your questions answered…

If you’re in an Individual Voluntary Arrangement (IVA) and you own a property, the Terms & Conditions of your IVA will probably include an ‘equity clause’, which needs to be addressed as part of the IVA process. Here is a quick guide to what it means, and how it may affect you…

 

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What is ‘equity’?

If you own your home (or any other property), the ‘equity’ is the current market value of the property minus the total outstanding amount of any mortgage and other loans secured on it.

Here’s an example: Bob is a homeowner. His property is currently worth £150,000. His outstanding mortgage is £75,000. He also has a secured loan on the property, with £25,000 outstanding. So, his equity is £50,000.

  • Current property market value: £150,000
  • Minus outstanding mortgage: -£75,000
  • Minus outstanding secured loan: -£25,000
  • EQUITY = £50,000

Like Bob in the example above, you may have some equity in your property. But you may also find you have zero equity – or even negative equity, if your outstanding mortgage and secured loans are higher than your current property value.

What has my ‘equity’ got to do with my IVA?

Basically, if you do have any equity in your property, this value is seen as an asset by your creditors.

The ‘equity clause’ in your IVA proposal means that you may need to try to release some of your share of the equity and pay it into your IVA for the benefit of your creditors.

Is my home at risk?

No – your home is not at risk, as long as you fulfil all your obligations as set out in your IVA proposal. And for your protection, the ‘equity clause’ includes strict guidelines on the amount of equity you can be asked to release, and what happens if you can’t get a re-mortgage or other type of secured loan to release it. See below for more details.

When do I need to deal with the ‘equity clause’?

This usually happens towards the end of your IVA. You will normally be contacted by your IVA provider about 6 months before your scheduled IVA end date – so, in a standard IVA, this will be around the 54th month of the arrangement.

What is the process?

Your IVA provider will usually guide you through the process, making it as easy and hassle-free as possible. Here is a quick summary of the normal process:

1. Gather information: Your IVA provider will normally ask you to get hold of the following information and send it to them. Note: it must all be recent – i.e. dated in the last 3 months:

  • Official valuation of your property – you can ask a local estate agent to value your property
  • Redemption statement for your mortgage – you can ask your mortgage lender for this. It should show your current outstanding mortgage amount and the remaining mortgage term
  • Statements for any other secured borrowing or debts (if applicable) – you can ask your lender(s) for these. This includes any second mortgages, secured loans or charging orders you may have
  • Endowment statement (if applicable) – you can ask your endowment provider for this

2. Calculate your equity: Your IVA provider will use this information to work out if you have any equity in your property – and if so, how much. See ‘How much equity of my share of the equity will I need to try to release?’ below for how this is worked out.

3. Deal with the ‘equity clause’: Your IVA provider will tell you what you need to do (if anything) in order to deal with the ‘equity clause’ and satisfy the creditors included in your IVA. This will depend on how much your share of the equity in your property is worth:

  • Little or no equity? If your share of the equity in your property is £5,000 or less, you normally won’t need to take any further action. The creditors will recognise that you don’t have any (or only minimal) equity, and can’t expect you to pay any more into your IVA in lieu of the equity in your property
  • Significant equity? If your share of the equity in your property is over £5,000, you may be asked to try to release some of this equity and pay it into your IVA. If you can’t release any equity – for example, if you get declined for a re-mortgage or secured loans – you may need to do something else instead. See below for more details

How much of my share of the equity will I need to try to release?

You will never be expected to try to release all of your share of the equity in your property, because the calculations are based on 85% of your interest in the property.

Here’s an example: Bob is a homeowner in an IVA. His property is currently worth £150,000. His outstanding mortgage is £75,000. He also has a secured loan on the property, with £25,000 outstanding.

  • Current property market value: £150,000
  • Minus outstanding mortgage: -£75,000
  • Minus outstanding secured loan: -£25,000
  • Bob’s interest: £50,000
  • 85% of Bob’s interest: £42,500
  • Maximum equity that Bob could be asked to contribute to the IVA = £42,500

In the above example, Bob’s total equity in the property is £50,000, but he can only be asked to contribute a maximum of £42,500 to pay into his IVA.

If Bob is unable to obtain further finance on his property, or arrange for a third party to contribute this amount into the IVA,  he would instead be able to make 12 additional monthly contributions into the IVA.   For example, if Bob’s monthly IVA contribution was £200, he would simply need to pay £2,400 into the IVA over twelve months.  After this time his IVA would successfully complete, providing he has met all his other IVA terms and conditions. 

What else is taken into account?

Depending on the specific wording of your ‘equity clause’ – and subject to any modifications put forward by your creditors – there are likely to be other guidelines around the amount of equity you can be asked to try to release, and the further borrowing you take out in order to release it.

For example, these guidelines could include the following:

  • That the amount requested in your ‘equity clause’ should never be more than the total outstanding debt you owe to the creditors in your IVA plus the fees and costs of managing your IVA (but excluding statutory interest)
  • That the monthly repayment amount on the new borrowing shouldn’t be more than 50% of your regular IVA monthly payment amount
  • That any new re-mortgage – or secured loan – will be capped at a maximum of 85% loan to value (LTV) of your share of the property
  • That any new borrowing you take out to release the equity shouldn’t extend beyond the end of your existing mortgage or your state retirement age – whichever is later
  • That any fees or charges you have to pay to set up the new borrowing may be funded out of the money you release – meaning you’d only have to pay what’s left after this into your IVA

What if I have a joint mortgage?

If you have a joint mortgage with someone else, your creditors can only ask you to try to release part of your share of the equity in the property.

Here’s an example: Bob is in an IVA. Bob and his wife are joint homeowners. Their property is currently worth £150,000. Their outstanding mortgage is £75,000. They also have a secured loan on the property, with £25,000 outstanding.

  • Current property market value: £150,000
  • Bob’s half share of the property value (50%): =£75,000
  • 85% of Bob’s half share of the property market value: =£63,750
  • Minus Bob’s half of the outstanding mortgage (50% of £75,000): -£37,500
  • Minus Bob’s half of the outstanding secured loan (50% of £25,000): -£12,500
  • Maximum equity that Bob could be asked to release via a re-mortgage or secured loan: = £13,750

In the above example, Bob’s share of the equity in the property is £25,000, but he can only be asked to release up to a maximum of £13,750 it to pay it into his IVA, as any re-mortgage cannot exceed 85% of the Loan to Value in his share of the property.

How should I try to release the equity?

You’ll need to try various methods to release the equity amount requested by your creditors. Here are some of the main ways:

  • Contact your existing mortgage provider to see if you can re-mortgage
  • Contact other mortgage providers to see if you can switch lenders
  • Contact secured loan providers to see if you can take out a loan secured on your property
  • Consult an Independent Financial Adviser (IFA) or a ‘whole of market’ mortgage/loan broker to help you with this process, but please bear in mind that they may make a charge for this service

What if I can’t release the full amount of equity requested?

Depending on your new lenders’ criteria – and working within the above guidelines – you may find you can release some equity from your property, but not the full amount requested.

In this case, if you can prove that you can’t release any more funds, your creditors may accept the lower amount, or they may stipulate that you need to do something else instead (see below for more details).

What if I can’t release enough equity, or any equity at all?

You may find you can’t release enough equity to comply with the requirements in your ‘equity clause’. Or maybe you can’t release any equity at all – for example, if you get declined for a re-mortgage or secured loans. In this case, your creditors may require you to do something else to compensate them for the fact that you have equity in your property that they can’t get hold of. Options may include:

  • EITHER: Getting a partner, friend or family member to pay a lump sum into your IVA for you. Normally this will need to be the equivalent of up to 85% of your share of the equity in your property
  • OR: Extending your IVA by up to 12 months, and making up to 12 more monthly payments into your IVA before it is completed. So, in a standard IVA, this will mean extending it to a 6 year arrangement – unless your arrangement is extended for other reasons (e.g. missed payments, payment breaks, etc.)

What if I have any questions that aren’t answered here?

If you’re in an IVA with one of PayPlan’s associated companies, you can contact them as follows:

  • PayPlan Partnership Limited (IVAs): 0800 912 7269
  • PayPlan Bespoke Solutions Limited (Self-Employed IVAs): 0800 912 7269

More Information on IVAs