If one changes one's mortgage from repayment to interest-only in order to release more funds to facilitate an IVA, how would a desire to return to repayment (at IVA end) impact on any requirement to re-mortgage. do I have a 'right' to return to repayment?
I think you would be able to change back to a repayment mortgage. Not sure how it would impact on any remortgage needed, I assume that would depend on how much equity there was.
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If you switch to a repayment at end this could wipe out your DI leaving an equity release unaffordable. It is dubious if creditors would allow you to retain a lot of equity and not release it. I would seek clarification from the IP before I agreed as you could find yourself on a higher mortgage but still interest only.
The beloved IVA protocol is actually silent on this point - but does state that your mortgage payments must be no more than 50% of the DI you will then be paying into the arrangement.
I would encourage all of my clients to take their new mortgages (if any will eventually be available at 85% LTC to people who are in IVAs in five years time)on a repayment basis - as you will have lost almost five years of capital repayments whilst paying creditors.
I agree that this is totally unclear and many clients could be in for a rude awakening in year 4 or 5. To switch to an interest only mortgage to free up a surplus to fund an IVA is not uncommon. However, if the client is then not allowed to switch back at the end because protocol says they must remortgage to 85% loan to value and pay a higher mortgage than was currently being paid, then the client should have gone bankrupt day one. They would probably have had little if any equity given the current climate and no DI for an IPO as the OR is unlikely to try and force a bankrupt to go interest only.
Hi
As long as the Client can raise the required equity via a remortgage then surely the choice of interest only or repayment should be down to the client ?
If the remortgage was timed to complete at the end of the IVA then leaving no, or little, DI will not matter.
Regards
Good practical point Andy, but read the following extract from the IVA protocol
9.4 The costs of re-mortgaging to release equity should be deducted from the mortgage proceeds and the monthly payments deducted from the contribution. If the increased cost of the mortgage means that dividends to creditors fall below £50 per month after fees, monthly contributions are stopped, and the IVA is concluded.
The basis of the remortgage could therefore effect the final few payments depending upon how long it took to arrange.
Hi
Agreed
So really it would be sensible to time the remortgage to the final month of the IVA, if changing from interest only to repayment.
This is clever wording by the creditors because if the maximum remortgage can't cost more than 50% of the current IVA payment then no-one will ever find their remortgage decreasing their creditor dividend below £50.
For example even if someone was paying £150 per month for their IVA and the maximum remortgage can't cost more than 50% of this then it will reduce their DI down to £75, after fees of 15% creditors will get £63 per month. I can't see anyone's IVA finishing early due to the £50 mimimum threshold !!!
Or am I missing something ?
It would be interesting to know how many of the main players in the mortgage market react to customer attempts to switch to Interest Only and also to remortgage.
I doubt many lenders show a favourable credit score for any of us trying to go through an IVA. Would that not make it difficult to obtain a further mortgage advance without receiving a more punitive interest rate based on a revised risk level?
Also intersted to know if other mortgage lenders are happy with clients requesting to switch to Interest Only when they (lenders) are all trying to limit the liquidity exposed to high risk customers...
I am in a 15 year fixed deal with my employer it includes significant penalties to change as the product carries 'golden handcuffs'. I am seeking clarification from them as there may also potentialy be a penalty for switching to interest only as this is in effect a product change? If it is the case, it may incur higher interest as well as charges to change - should have this confirmed tomorrow!
The issue of re-payment or interest only mortgages at time of re-mortgage is being looked into by the Technical Sub-Committee and will be reported on soon.
Regards, David Mond, Insolvency Practitioner for over 46 years. Personal Insolvency Practitioner of the year 2012, Personal Insolvency Practitioner of the year finalist 2013 & 2014 awarded by Insolvency & Rescue Magazine and 2015 finalist for Personal Insolvency Firm of the Year.
There is still clarification I would like. If the client can raise equity in year 5 by remaining interest only but cannot raise equity if they switch to repayment because they cannot afford to, under protocol what does the Supervisor do?
Ultimately goes to creditors to ascertain their wishes - but personally I wish this could be a lot clearer and avoid unecessary final year variations. How about -
"The debtor has to demonstrate whether they can raise funding to meet the costs of a new repayment mortgage, based on a maximum 85% loan to value basis, by obtaining a confirmatory letter from an Independent Financial Advisor of the Supervisor's choice. With the permisson of the Supervisor, the debtor is then to proceed to seek an offer of re-mortgage on said basis and introduce his/her share of the resultant funds into the voluntary arrangement for the benefit of creditors, subject to a deminimis level of £5,000.
If such confirmation cannot be provided, the Supervisor will proceed to conclude the voluntary arrangement by the due date by nature of substantial completion.
