IVA Holders Face Mortgage Problems

Many people who have had problems with personal insolvency are likely to face a double hit with interest rates in the next year.

People with Individual Voluntary Arrangements (IVAs) have to realise some equity in their properties to use the cash to help pay off their debts. The problem is that the new mortgage they will have to take out is likely to be at a higher rate than their current loan as rates have gone up, and in addition to that the credit crunch is affecting those with credit problems worse than others, so their new rates will be even higher.

IVAs have become popular as alternatives to bankruptcy. Those in financial trouble agree to a repayment scheme with their creditors. It reduces the amounts to be paid back, but at least the creditors get something for their agreement. They have been available for over 20 years, but have been used a lot more in the last five years. A lot of people are due to come out of their IVA in the next 12 to 18 months and will need to remortgage.

An analyst in the insolvency advice business said: “There is a problem here. People in an IVA will be remortgaging into something significantly more expensive. Not only are mortgage rates higher than when these people bought their houses, but they could well be classified as sub-prime - that is to say as riskier borrowers who need to be charged more to compensate for that risk.”

All IVAs contain a clause which states that borrowing for equity release must be ‘affordable’. If some people with an IVA claim they cannot affor the new mortgage, then lenders may be forced to write off the money it had expected.

Marketing director with leading debt advice company ClearDebt, Andrew Smith, said: “Banks have agreed to take this on the chin.”

The British Bankers’ Association said it had not heard of any if its members being concerned about a shortfall.