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Will a IVA affect my home-mortgage?

The individual voluntary arrangement (IVA) is a legally binding agreement that aims to steer debtors away from bankruptcy by ensuring that affordable monthly repayments are agreed over a fixed period of time (usually up to five years). Implementation of an IVA often results in only a proportion of the total debt being repaid, but it can also mean that an individual`s credit rating is affected for a number of years. Mortgages, loans and credit cards can be difficult to obtain with a poor credit rating, so understanding how the IVA affects homeowners and prospective buyers is obviously very important.

One problem faced by a prospective property buyer who has entered into an IVA is that he may not be able to acquire a mortgage.

Mortgages are notoriously difficult to obtain for any person whose credit rating is not good or excellent. This ought not to be surprising because mortgages invariably deal with very large amounts of debt - few banks and mortgage providers can risk sub-prime lending in the current economic climate, so applicants whose credit profiles are not squeaky clean are typically rejected. Unfortunately, an IVA can stay on record for up to six years from the date of the original creditors meeting, so securing a mortgage during this time is virtually impossible for most ordinary people.

Another consequence of an IVA is that prospective buyers are unlikely to hold any kind of savings, which are often used to lay down deposits on houses or to make early repayments on mortgages. Equally, the IVA ensures that borrowers pay off some or all of their debts at an affordable rate, which means that income intended for mortgage repayments might be required to satisfy debts.

If a homeowner is already in the process of paying off a mortgage when he happens to experience debt problems, the IVA should not cause him to lose his home because secure debts are excluded under the terms of an IVA; however, whilst invariably a better option than bankruptcy, the IVA is still capable of punishing homeowners.

One of the main objectives of an IVA is to ensure that the debtor makes affordable monthly repayments to his creditors. What constitutes affordable in the circumstances obviously varies between cases, so there is no specific value or figure that applies to all debtors. Certain criteria will be expected of the debtor; for instance, he is required to make all repayments in full and on time without exception.

During the process of entering into an IVA, the debtor is usually required to consider ways in which he will be able to afford his debts. If the debtor happens to be paying off a mortgage, it is quite possible - and more than reasonable - for creditors to insist that a certain amount of equity is released from the property in the final year of the IVA.

Although clearly undesirable, losing some equity in favour of retaining ownership of a home - which would not be the case if the debtor applied for bankruptcy - is not necessarily the worst case scenario.