New customers - IVA Protocol 2014

I see that the new terms for the 2014 IVA Protocol are now agreed and online at the governments insolvency website. The major change is section 9.2, that now introduces secured loans as an alternate option too remortgage to release equity.

An extra year in lieu of equity is now not likely and debtors will end their IVA with increased secured lending. Although I can understand why creditors are looking to introduce this, it is a shame there are no additional controls on the cost of this lending. Just the existing clauses that it should not be greater than 50% of current payment or extend the mortgage length. No protection in terms of interest rates or setup costs. I can see nothing to stop a company just shaping a secured loan to maximize their profit but just fit into the above criteria. The debtor would have no choice.

Just hope this is fully explained to clients at the outset and company;s will need to drop their favoured tag line, "debt free in 60 months".

Wonder how this may affect the industry? Thought?

Hi

It is concerning and anyone advising clients on potential IVAs needs to ensure that this point is covered. This may move people back towards protocol DMPs rather than IVAs ?

Regards

The thought of being forced yo take out a secured loan at the end of an iva is not good! Will there be companies willing to do this ...of course there will and no doubt with high interest rates !!!!

How much extra will iva firms make in introducer fees for these loans? And why bother with an iva at all if you are going to transfer unsecured debts into debts secured on your bricks and mortar?

This should only apply where significant equity exists.

Paul

Hi

Someone is paying £350 in an IVA, 15 years left on their mortgage and 20k of equity calculated at 85% LTV. They could possibly be left with a 15 year 20k secured loan at £175 per month ??

Regards

It would seem that protocol debt management plans may be the way forward for many debtors now......

Hi

I tend to agree, up until now I thought the IVA would continue to increase market share against DMPs however the Secured loan element will scare many people off, until now it has been presumed that a 12 month extension will be the norm

Regards

It was always advisable to try and not turn unsecured debt into secured debt for fear of default and losing your home. It seems now that this is not the case and I personally think that this will scare a lot of potential IVA clients away and more in favour of a more informal solution such as a DMP.

Yes, this is all a bit up in the air, but before people start fretting undully about this, we must remember that, strict affordability criteria apply. Monthly loan repayment is limited (max.50% of current IVA payment, with remaining IVA repayments reduced by the same amount). So the higher the APR, the less you can borrow. As soon as your credit rating is restored, you swap to a sensible-APR loan (may be easier said than done of course).

One assumes as well that usual lending criteria will apply, such as multiples of the secured debt in relation to your income. In my case for example, my mortgages total approx. 7x my household income. So even if I had significant equity, it is doubtful if anyome is going to give me any more 'secured' borrowing.

Furthermore, without wanting to sound too controversial here, my attitude towards equity release via the secured loan route, has relaxed somewhat. Compared to a sub-prime remortgage for the entire property debt, keeping your prime mortgage, and only having to take out a relatively small loan (even with the shocking fees and high-APR), will actually work out massively cheaper in the long-run for many (not as cheap as a 12-Month extension, I grant you).

I also wonder if, now that this protocol is in place, there will be more secured loan competition between companies. This may help lower the current extortionate credit-card-like interest rates being charged by some loan companies at the moment, not to mention the mickey-taking 'arrangement' fees.

But for sure, if you are a homeowner contemplating an IVA now, you will have to factor in the 'risk' that you may end up with one of these products. If it is then going to take say, 15-20 Years to become debt free, then alternatives like DMP's may suddenly seem a little more attractive in comparison.

Time will tell.

You can be certain as well that the first few months APR will be structured to me the 50% IVA rule an once you have taken it out the rate will rocket.

The apr on secured loans will go up with the interest rates too so your loan repayments wont be fixed.

interesting times ahead.

Paul

...if you take out a variable-rate product.

There are 'fixed rate' loans available as well I assume?

Would be interesing to get Shaun Vickery's opinion on this.

I know he posts on this forum, and has experience in offering these products. Hopefully he can offer an industry perspective and provide some clarity.

Am I the only one who thinks an IVA won't be worth the paper its written on soon?
Its seems to me the new protocol is defeating the reasons why people may take out an IVA.
Just hope people will consider the factor of debt against debt especially one that can take away your home if you fail!
Watching with interest as to where this goes.

With this new protocol i cannot see the point of taking out an iva for 5 years if you have equity in your property.

If you get into financial difficulty you should be able to go to someone like the select partnership(other companies are available!)and ask them for a secured loan and do a full final iva instead of paying for 5 years then remortgaging.

I've often felt like a lone (or should I say 'loan'! voice) in this debate but I've maintained all along that it's about considering all options. Where we do arrange secured loans for customers in this situation the feedback has been incredibly good but unfortunately people very often jump to wild and entirely inaccurate conclusions. Logically creditors will want to feel as though debtors have done their utmost to repay as much of the debt as they can reasonably afford - and after all, why shouldn't they? In my experience the biggest issue is fear of the unknown and, once the options can be set out in black and white, things tend to become much clearer. Talk of sky-high APR's is actually entirely exaggerated but here's the rub; ironically often the higher the rate the better. That's because the higher the rate then the less you can borrow for 50% of your IVA contribution. Keep your mortgage on a lower rate, save yourself the potentially significant up-front costs of remortgaging, raise a smaller amount to settle your IVA and then remortgage when it's best for you, not when your IVA says you have to. It can also mean you avoid locking yourself into an uncompetitive rate with huge Early Repayment Charges. APR's are certainly not engineered, it really isn't that conspiratorial; don't forget we now operate in a highly regulated environment. In fact the rates are normally the same for a customer who hasn't had an IVA as one who has. The simple reason is that people who have been in IVA tend to pay just as well, if not better. It's also possible to fix the interest rate for the early period of the loan. I've presented here many reasons why a secured loan can be better than a remortgage but just to be clear I'm not suggesting it always is either. It just depends on individual circumstances.