4th Year Equity Release

[thebear29uk]

Hi All

I was reading the paper today and there was an article related to the interest rate rise and experts were saying that there was a possibility that property prices might fall and repossessions would increase. How would the issue of negative equity be addressed at year 4 in this scenario or do IVA's with this clause already have an alternative - e.g. 12 extra payments - built in to the contract.

If somebody with a mortgage that has risen because base rate is say 6.5% has had to reduce payments to the IVA following an updated I/E breakdown and then has no equity to release could they be feasibly 2-3 years into the IVA then have it fail due to not delivering the expected dividend.

Catcullus was making this point before going on holiday regarding people being reluctant to sell their property and rent, instead choosing to soldier on. But this could end up with the very thing you were trying to protect i.e. the family home, being taken from you anyway because of the IVA failing and people declaring themselves BR.

The other point I would like to make is that in year 4 you may be able to re mortgage for any equity but then you would be making additional payments for the equity amount at a possibly much higher rate than now from a sub-prime lender which means your IVA might be finished but your disposable income will be about the same post IVA as whilst in it and this will be for the remainder of the mortgage.

I should point out that I am no expert when it comes to the economy and interest rates and I appreciate that others will be able to use an equity release to end their IVA early (like Andy) but enough people post on here that they dont understand the year 4 equity release clause and I feel that not only is it important to understand that it will happen but people should realise how much this might cost and for how long it will effect them post IVA.

Regards

Dave

[MelanieGiles]

Hi Dave

The recent forums chaired jointly by the British Bankers Association and the Department of Trade and Industry have gone a long way to confirm the treatment of equity in properties. It is now very likely to be confirmed as a standard IVA term and condition that the property be valued in the final year of the IVA, with a remortgage based on a maximum of 85% loan to value. This sum would then be used to firstly pay off the existing mortgage and other secured charges, leaving a balancing sum to introduce into the IVA. Another useful caveat is that the cost of the new mortgage must not exceed 60% of the debtor's disposable income, and that contributions to the voluntary arrangement may stop as soon as the money is raised. I must stress that this only relates to main residences rather than investment properties.

So if the value of the property does produce any ability to fund equity release, so be it. The IVA will not fall into failure, and can be concluded upon the payment of the sixtieth payment.

I have not yet seen anything mentioned about dealing with negative equity, and do not expect debtors to have to pay additional contributions if they fall into this bracket.

Regards, Melanie Giles, Insolvency Practitioner for over 20 years.

For further details contact me at http://www.melaniegiles.com and view my IVA blog at: http://melaniegiles.blogs.iva.co.uk

[thebear29uk]

Hi Melanie

As you know this would not apply to me but having read about the possibility of house prices crashing I wondered how that would affect people with the equity release clause. So in conclusion somebody going into an IVA now with a 4th year equity release could find that in 4 years time they have negative equity in their property. If so they would continue with their monthly payments until the 60th one has been paid at which point the IP would issue a certificate of due completion. Or if there is a shortfall would the IP have to call a variation meeting to ask the creditors if they will accept the lesser dividend.

Regards

Dave

[MelanieGiles]

Yes - that is the height of it. IVA proposals relying upon equity releases, which are never certain, should not seek to guarantee dividends. This then alleviates the need for an unecessary variation - but I am glad that you have raised this point Dave, as I now intend to tweek my standard proposals a little to emphasise this issue.

See even crusty old IP's can learn something from the forum!!!

Regards, Melanie Giles, Insolvency Practitioner for over 20 years.

For further details contact me at http://www.melaniegiles.com and view my IVA blog at: http://melaniegiles.blogs.iva.co.uk

[Adam Davies]

Hi
I think that the fourth year equity release clause does cause the most amount of questions and uncertainty.I,m glad that it looks as if the maximum that can be raised will cost no more than 60 percent of disposible income.
I would still like to see an amount agreed at the start of the IVA and a solicitor involved so that everyone fully understands the process.
if you look at adverts for IVAs no mention is made to possible equity release and I feel that it should.
If house prices continue to rise at the current rate then many people in an IVA with the current clause could well be paying back all their debts plus fees.
Not quite what they expected.
regards

Andy Davie
IVA.co.uk Spokesperson

About me:
http://www.iva.co.uk/andy_davie_profile.asp

IVA Helpline: 0800 197 4838
http://www.iva.co.uk/iva_helpline.asp