Remortgage to Pay Off an IVA

How Does Remortgaging to Pay Off an IVA Work?

Remortgaging to pay off an IVA early involves releasing equity from your property to generate a lump sum that can be used to settle the remaining debt owed to your IVA creditors. When creditors receive this settlement, the IVA is brought to an early conclusion and you receive your completion certificate sooner than originally planned.

The process typically works as follows. You apply for a remortgage that is larger than your current mortgage balance. The difference between your new mortgage and the existing one, minus any fees and costs, becomes the lump sum available to settle your IVA. This lump sum is paid to your Insolvency Practitioner, who distributes it to your creditors according to the terms of your arrangement.

For example, if your property is worth three hundred thousand pounds and your current mortgage is one hundred and fifty thousand, you have one hundred and fifty thousand pounds of equity. If you remortgage to two hundred thousand pounds, the fifty thousand released, after costs, could be used to settle your IVA.

However, the amount needed to settle your IVA early is not simply the total outstanding debt. Your IP will calculate a settlement figure that typically represents what creditors would have received had the IVA run its full term, plus any additional amount the creditors agree to accept. In many cases, this is less than the total original debt, as IVAs usually only repay a proportion of what is owed.

The feasibility of this approach depends on whether you have sufficient equity, whether a lender will approve the remortgage while your IVA is still active, and whether your creditors will accept the proposed settlement terms. All three elements must align for the early settlement to proceed.

Benefits of Paying Off Your IVA Early

There are several compelling reasons why homeowners might want to pay off their IVA early through remortgaging. Understanding these benefits can help you decide whether this is the right strategy for your circumstances.

Reduced duration on your credit file. An IVA remains on your credit file for six years from the date it was registered. If your IVA was originally scheduled to last five years but you pay it off after three years, the record will drop off your credit file sooner in practical terms because the six-year clock started at registration rather than completion. This can give you a head start in rebuilding your credit and accessing mainstream financial products.

Freedom from IVA restrictions. While your IVA is active, you face restrictions on obtaining credit, and your financial life is subject to oversight by your IP. Completing the IVA early restores your financial freedom sooner, allowing you to manage your money without these constraints.

Potential overall savings. Depending on the numbers, paying off your IVA early could save you money in the long run. While the remortgage will increase your mortgage balance, the total cost of the additional borrowing over the mortgage term may be less than the total of your remaining IVA contributions. This needs to be calculated carefully, taking into account the higher interest rate you are likely to pay on the remortgage.

Emotional and psychological benefits. Living under an IVA can be stressful, and the knowledge that it will continue for several more years can weigh heavily. Early completion provides peace of mind and a sense of closure that has genuine value, even if it is difficult to quantify financially.

Improved mortgage options sooner. Once your IVA is completed, you can begin rebuilding your credit and working towards a mainstream remortgage. The sooner you complete the IVA, the sooner this process can begin, potentially saving you considerable sums on future mortgage deals.

It is important to weigh these benefits against the costs and risks. Adding debt to your mortgage means you will be paying it off over a much longer period, potentially twenty-five years or more, and the total interest paid could be substantial. A careful financial analysis is essential before proceeding.

Getting Your Creditors to Accept Early Settlement

Before you can pay off your IVA early through remortgaging, your creditors must agree to accept the proposed settlement. This is not automatic, and understanding how the negotiation process works can help you achieve a successful outcome.

Your Insolvency Practitioner will manage the negotiation process with your creditors on your behalf. They will present the proposed settlement as a modification to the original IVA terms, and creditors will vote on whether to accept it. For the modification to pass, creditors holding 75 per cent of the debt by value must agree.

Creditors are more likely to accept an early settlement if:

• They receive at least as much as they would have under the original IVA - The settlement amount should ideally match or exceed the total dividends they would have received over the remaining term of the arrangement
• They receive the money sooner - Getting a lump sum now is often more attractive to creditors than receiving smaller amounts over several years, due to the time value of money and the administrative costs of managing the IVA
• The proposal is realistic - The remortgage must be genuinely achievable, with a mortgage offer in principle or even a formal offer to demonstrate that the funds will be available
• The arrangement is running smoothly - If you have been making your IVA contributions on time, creditors will have more confidence in a proposal from you

Your IP will advise you on what settlement figure is likely to be acceptable to creditors. This figure will take into account the remaining contributions due under the IVA, any equity clause provisions, the IP's own fees for administering the early settlement, and the current IVA balance.

If creditors reject the initial proposal, there may be room for negotiation. Your IP can put forward a revised offer, and in some cases, creditors may counter-propose with a higher figure that they would accept. This negotiation process can take several weeks to resolve.

It is worth noting that the costs of the early settlement process itself, including the IP's fees for arranging the modification and any associated legal costs, will typically come out of the settlement sum. Factor these costs into your calculations when determining how much equity you need to release.

Finding a Lender to Remortgage for IVA Settlement

Finding a lender willing to approve a remortgage that releases equity to settle an active IVA is one of the biggest challenges in this process. You need a lender who is comfortable lending to someone with an active IVA and who will allow the released equity to be used for debt settlement purposes.

The key requirements that specialist lenders typically look for in these cases include:

• Sufficient equity - After the remortgage, you will need to retain at least 20 to 30 per cent equity in the property, meaning you cannot release all of your available equity
• Affordable repayments - The new, larger mortgage must be affordable based on your income, and lenders will stress-test the payments at higher interest rates to ensure you can cope if rates rise
• Clean mortgage payment history - Lenders want to see that you have maintained all your mortgage payments throughout the IVA period without any missed payments or arrears
• IP endorsement - Written confirmation from your IP that they support the remortgage and that it forms part of an agreed plan to settle the IVA early
• Purpose confirmation - The lender will need to be satisfied that the additional funds are being used for legitimate debt settlement rather than any other purpose

Working with a specialist adverse credit mortgage broker is virtually essential for this type of application. The broker will know which lenders are currently accepting active IVA cases, what their specific criteria are, and how to present your application in the most favourable way.

The application process is likely to involve more scrutiny than a standard remortgage. The underwriter may ask detailed questions about your IVA, the circumstances that led to it, and the proposed settlement arrangement. Being prepared to answer these questions thoroughly and honestly will support your application.

Expect the overall process to take longer than a standard remortgage. Between obtaining IP consent, securing a mortgage offer, negotiating the settlement with creditors, and completing the legal process, the entire procedure can take three to six months from start to finish.

Calculating Whether Early Settlement Makes Financial Sense

Before committing to remortgaging to pay off your IVA early, it is essential to run the numbers carefully to ensure the overall financial outcome is genuinely beneficial. What seems like a good idea in principle can sometimes prove less advantageous when the full costs are accounted for.

The key calculations you need to consider include:

Total remaining IVA payments. Calculate the total amount you would pay if you continued with your IVA until its scheduled completion. For example, if you have two years left and pay four hundred pounds per month, your remaining contributions would total nine thousand six hundred pounds.

Settlement figure. Your IP will advise on the lump sum needed to settle the IVA early. This may be more or less than the remaining contributions, depending on the IVA terms and creditor expectations.

Additional mortgage costs. Calculate the total cost of the extra amount borrowed over the life of your new mortgage. If you borrow an extra thirty thousand pounds at a rate of six per cent over twenty-five years, the total repayment would be around fifty-eight thousand pounds, meaning you would pay approximately twenty-eight thousand pounds in interest on that additional borrowing.

Remortgage fees and costs. Account for arrangement fees, broker fees, valuation fees, legal fees, and any early repayment charges on your existing mortgage. These can add several thousand pounds to the total cost.

IP settlement administration fees. Your IP will charge fees for arranging and administering the early settlement, including the cost of obtaining creditor approval for the modification.

Opportunity cost of waiting. Consider what rates would be available to you if you completed your IVA normally and remortgaged afterwards. If waiting would give you access to significantly lower rates, the savings over the mortgage term could outweigh the benefits of early settlement.

A specialist broker or financial adviser can help you model these scenarios and determine whether early settlement through remortgaging genuinely saves you money overall. In some cases, the peace of mind and credit rebuilding benefits justify a slightly higher overall cost, but this should be an informed decision rather than an impulsive one.

The Early Settlement Process Step by Step

If you have decided that remortgaging to pay off your IVA early is the right course of action, following a structured step-by-step approach will give you the best chance of a successful outcome.

Step 1: Speak to your Insolvency Practitioner. The first step is always to discuss your plans with your IP. They will advise on the likely settlement figure, whether creditors are likely to accept early settlement, and what the process involves. They may also be able to recommend a specialist broker experienced in these types of cases.

Step 2: Assess your equity position. Obtain a current valuation of your property and calculate how much equity is available after accounting for your existing mortgage and the minimum equity a new lender would require you to retain. This determines the maximum lump sum available for settlement.

Step 3: Obtain a remortgage agreement in principle. Working with a specialist broker, apply for an agreement in principle from a suitable lender. This confirms that a lender is willing to consider your application and provides a credible basis for the settlement proposal to creditors.

Step 4: Negotiate the settlement with creditors. Your IP will present the settlement proposal to your creditors. This should include the lump sum available, evidence that the remortgage is achievable, and a comparison showing that creditors will receive at least as much as they would under the existing arrangement.

Step 5: Obtain creditor approval. Creditors vote on the proposal. If creditors holding 75 per cent of the debt by value approve, the modification proceeds. If the initial proposal is rejected, there may be scope for negotiation.

Step 6: Complete the remortgage application. Once creditors have approved the settlement terms, proceed with the full remortgage application. The lender will require a formal valuation, and the usual conveyancing process will need to be completed.

Step 7: Settlement and completion. On completion, the additional funds are released to your IP, who distributes them to creditors according to the agreed terms. Your IP then issues your IVA completion certificate, and the arrangement is formally concluded.

Step 8: Begin credit rebuilding. With your IVA completed, you can begin the process of rebuilding your credit score. Start with small steps such as registering on the electoral roll and using a credit builder card responsibly.

Throughout this process, maintain all your existing IVA payments and mortgage commitments. Any missed payments during the settlement process could jeopardise both the remortgage and the creditor agreement.