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Can I Get Equity Release with an IVA? FAQs & Tips

IVA Equity Release

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

IVA equity release refers to a clause within Individual Voluntary Arrangements (IVAs) that asks the debtor to release equity (an asset!) towards the end of their debt solution repayment plan and give the money to their IVA creditors. 

So, how can debtors release equity at this stage of their IVA, and can senior homeowners use an equity release plan to satisfy this clause? Find out more here!

What is equity release and how does it work?

Equity release is one of few options available to senior homeowners who want to access some of their home equity as a loan. 

They can take out either a lifetime mortgage or home reversion plan and never have to make any monthly repayments on the loan amount or interest. Their loan debt is only repaid when they pass away through a forced sale of their property. If the homeowner moves into long-term care, the property will then need to be sold to repay the loan (and any interest) earlier. 

Both types of equity release are only available when you turn 55, but it can be advantageous to wait as long as possible to use these schemes. You must be releasing equity from your main residence and the property must meet a minimum valuation set by the lender. Lastly, you must have already paid off all of your residential mortgage or be close to paying it off in full. 

If you are a senior and considering borrowing against the equity in your property, you should seek advice first and only use a lender that is authorised and regulated by the Financial Conduct Authority (FCA). 

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Lifetime mortgages explained

A lifetime mortgage gives the homeowner a loan and charges compounding interest on the loan. This compounding interest also rolls up since it doesn’t have to be paid, meaning the amount of interest grows each month – and so does your debt. Even with a standard interest rate, releasing around £50,000 and having your lifetime mortgage for 15 years can easily double what you owe – if not more than double it. 

Home reversion plans explained

It is less common to get a home reversion plan as a form of equity release in the UK, but they still exist. These plans ask the homeowner to agree to give the lender a large percentage of the future property’s sale proceeds in return for a much smaller amount of equity today. For example, you may get a loan worth 30% of your home equity but have to pay the lender 70% of the sale proceeds. 

Why do seniors release equity?

Seniors release equity so they can live more comfortably in later life. The money may be used as a way to pay for everyday expenses and bills in retirement, or it could be earmarked for more concrete plans and purchases, such as holidays, home improvements and healthcare services.

Some seniors use the money to help their children buy their first home and see their equity put to good use while they are still around.  

What is the catch with equity release?

Equity release sounds like a fantastic deal and you really do get cash and only have to repay the debt after death in most cases. But the catch is that equity release is expensive and can easily result in repaying more than double your loan amount. This will significantly detract from the inheritance you leave behind to loved ones. Those without children to leave their estate will find equity release a much easier decision. 

What is an Individual Voluntary Arrangement (IVA)?

An Individual Voluntary Arrangement (IVA) is a legally binding agreement between a debtor and their creditors to make repayments as stipulated in the agreement. The use of an IVA is reserved for people with multiple creditors and significant arrears. 

They are only available in England and Wales – Scotland does have an equivalent debt solution – and usually last between five and six years. Once an IVA term ends, all remaining debt is written off. 

What is the equity release clause?

Home equity is the value of the home you own outright. For example, if you own a £200,000 home with an outstanding £125,000 mortgage, you have £75,000 in home equity. This equity is seen as an asset by creditors and is also considered an asset within an IVA.

This is why many IVAs have an ‘equity release clause’ within the debt solution agreement. An equity release clause will state that the debtor is required to use some of their equity (i.e. an asset) to repay some of the debt owed to creditors listed within the IVA. 

This will require the debtor to ask to borrow against their home equity. If there are fees associated with setting up the new loan then these fees are also reduced from the debt within the IVA.

When do I need to deal with the ‘equity clause’?

The equity release clause only comes into effect near the end of your IVA term. You will be contacted around six months before the IVA ends. 

The IVA provider will first ask you to collect information, namely:

  1. An official valuation of your property by asking a local estate agent. 
  2. Evidence of your current mortgage debt
  3. Evidence of any other debts secured by your home or home equity.

This information will be used to work out how much equity you have in the property.

How much equity can the IVA provider ask to be released?

You can only be asked to try and release 85% of the equity you have. So if you have £100,000 equity in your £200,000 property, you can only be asked to release £85,000 at most. If the property is jointly owned with a joint mortgage, the sole debtor can only be asked to release 85% of their share only. 

Interestingly, if you have less than £5,000 equity in the property the IVA provider and lenders will not make you pursue releasing equity as a way to pay back some of your debts. 

Can I get equity release with an IVA?

Even though you do not have to make repayments when taking out a lifetime mortgage or home reversion plan, the lender will still check your credit file for unpaid debts, CCJs and active IVAs. 

If you have an IVA, It is highly unlikely that you will be able to use an equity release plan to loan money as a senior and satisfy the equity release clause.

However, once your plan is finished and you have a clean bill of financial health, you will be able to use equity release if applicable. 

You might not be able to get a secured loan or other credit that requires monthly repayments immediately because your credit score will still be very low and the IVA will show on your file. 

Do I have to remortgage at the end of an IVA?

Remortgaging and asking to borrow more against your equity is a possible solution to releasing equity and satisfying the equity release clause. However, many mortgage lenders will be reluctant to lend you money after having and still having an IVA. 

Can I get a secured loan with an IVA?

Another way of borrowing against your home equity is with a home equity loan. But again, lenders are unlikely to lend to someone with an active IVA and previous debt problems. 

Dispute the unlikeliness of accessing a secured loan against your equity, you must still try as per the conditions of your IVA. 

What if I can’t release the full amount of equity required?

If you fail to release equity or fail to release the amount of equity required to repay your IVA creditors, you may be asked to do something else to repay some of your debts. You may be asked:

  1. To get friends or family to make a lump sum payment into your IVA. The payment will usually need to be 85% of your share of home equity, which could be thousands of pounds. 
  2. To extend your IVA and monthly repayment for 12 months. This is what transforms most five-year IVAs into a six-year IVA.

Can I sell my house after an IVA?

You can sell your home after an IVA has ended. The amount you receive from the sale may be less because the equity in your property will have been reduced by sufficing the equity release clause and any existing residential mortgage debt. 

IVA equity release – Quick recap!

IVA equity release is a clause within an IVA agreement within six months of its primary end date that asks the debtor to release equity above £5,000 to repay some of the debt to creditors – before the remainder gets wiped. Homeowners might consider using an equity release plan, remortgaging to borrow more, or a home equity loan to suffice this clause. However, borrowing while on an IVA can be difficult and you can be denied further credit.

If you cannot suffice the equity release clause, you will be asked to extend your IVA by 12 months instead. 

Need more IVA equity release assistance?

For more help understanding the complexities of IVAs, why not check out our dedicated IVA guide

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