Possible future problems for homeowners on IVA programmes

According to a recent report some people on IVA programmes who are also homeowners could face problems in the final part of their IVA term, and could find themselves hit with extortionate interest rates as a result of having to remortgage or borrow against the equity in their home in compliance with a clause that is in the IVA agreement.

This could cause many problems for these homeowners, who could face crippling repayments on the amount that they have to borrow.

An IVA is an agreement whereby the borrower pays a set amount each month for five years, and this money is distributed between the creditors on a pro rata basis. At the end of the five year term any remaining balance is written off.

However, if the IVA has been taken out by a homeowner there is a clause that requires the homeowner to use the equity in the home to put towards the debt, usually in the last year of the agreement, although the homeowner does not have to sell the home.

There are two problems that these homeowners are likely to face, which could see them paying significantly higher rates on the amounts that they have to borrow.

The first problem is that interest rates are probably much higher now than they were when the homeowners took out their original mortgage, so when they have to remortgage or borrow to release their equity the interest rate they pay is likely to be far higher.

The second issue is that because of the IVA they will be classed as higher risk, sub-prime borrowers, and this will also result in paying a higher rate of interest.

One industry official stated: ‘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.’