IVA Equity Release: Remortgage vs Secured Loan

UpToMyNeckInIt

This subject has again been the subject of recent debate on another forum: IVA customers seemingly being compelled to take out 'secured loans' at equity release time.

I must emphasise, that the IVA customers I've come across currently encountering the issue of being offered sub-prime secured lending, all have pre-2010 protocol IVAs. I understand that some of those earlier plans specifically require equity release to meet dividend requirements (no 85% LTV provision in some cases). Almost a 'remortgage, or sell-up' type condition, to meet the dividend requirement. Whether or not this provision will catch any protocol-compliant plans will only really start to come to light in 2014/2015.

Now, I am NOT blindly defending secured loans (I have made my distaste of the sky-high interest rates and fees known!). But there appear to be some IVA customers, who have signed up to releasing equity with no intention of doing so, ie: Gambling on the assumption that they will just get a 12-Month extension instead. Indeed this is still the most likely outcome.

Fact is, though that there is a remortgage product from 'Magellan Homes' available to IVA customers at 7.55% with a LTV of 65%. Have a look:

http://www.magellanhomeloans.co.uk/media/6336/Magellan%20Homeloans%20Product%20Guide%20August%202013.pdf

There will of course be more products available as the housing market frees up, and banks continue to relax mortgage criteria. Those of us that may fall foul of the equity release provision should be aware of this rapidly evolving situation.

Remember also that the loan repayment can only be at 50% of the IVA payment so the higher the APR the lower the amount that can be borrowed.

Example:

OK, the variables here are huge, but using some of the figures banded around on this and other forums, fact it (as much as I detest the interest rates and extortionate fees) IT IS cheaper to take out a high APR secured loan over a remortgage in some cases.

Assume an IVA customer and homeowner currently repaying £500pcm into their IVA. Their house is worth £242,400 (about the UK average), but mortgaged at £145,000 at 4.5% apr over 20 Years. Monthly mortgage repayment around £900-£930pcm.

At equity release time, they have to attempt to raise £10K through equity release. (Assuming they meet all affordability criteria).

Choices:

1). Remortgage offered for £155K at 7.55%apr for 25 Years = £1126pcm.

Total repayable: £337,600. Total interest paid £182,600 (as opposed to the £78,000 to £95,000 interest on the 'normal' mortgage). So the remortgage leaves the customer £87,500 worse off at best assuming it goes to term.

2). Secured loan for £10K at 18%apr for 10 Years = £172pcm.

Total repayable: £20,600. Total interest paid £10,600.

Option 2 leaves the customer nearly £77k better off.

...OK, my maths may not be dead-on, but you get the idea.

My contract specifically requires me to attempt a 'remortgage'. From what I understand, a 'mortgage' and 'secured loan' at 2 separate legally defined products.

Therefore, if my IP tries the 'go for this secured loan' approach, I think I would have reasonable grounds to refuse, arguing that the request falls outside the terms of contract.

Saying that, in the (still very unlikely) event of being offered a remortgate at a sub-prime rate, ONLY THEN is it worth looking at the secured loan route as a viable alternative.

Hopefully of course, you get a couple of mortgage application rejection letters, and get a 12-Month IVA extension instead.

In summary, faced with the prospect of a sub-prime mortgage offer (but ONLY if I have a remortgage offer), I know what I'd go for: Give me the loan, as extortionate as it is, any day.

Depth_Charge

UpToMyNeckInIt wrote: »

This subject has again been the subject of recent debate on another forum: IVA customers seemingly being compelled to take out 'secured loans' at equity release time.

I must emphasise, that the IVA customers I've come across currently encountering the issue of being offered sub-prime secured lending, all have pre-2010 protocol IVAs. I understand that some of those earlier plans specifically require equity release to meet dividend requirements (no 85% LTV provision in some cases). Almost a 'remortgage, or sell-up' type condition, to meet the dividend requirement. Whether or not this provision will catch any protocol-compliant plans will only really start to come to light in 2014/2015.

Now, I am NOT blindly defending secured loans (I have made my distaste of the sky-high interest rates and fees known!). But there appear to be some IVA customers, who have signed up to releasing equity with no intention of doing so, ie: Gambling on the assumption that they will just get a 12-Month extension instead. Indeed this is still the most likely outcome.

Fact is, though that there is a remortgage product from 'Magellan Homes' available to IVA customers at 7.55% with a LTV of 65%. Have a look:

http://www.magellanhomeloans.co.uk/media/6336/Magellan%20Homeloans%20Product%20Guide%20August%202013.pdf

There will of course be more products available as the housing market frees up, and banks continue to relax mortgage criteria. Those of us that may fall foul of the equity release provision should be aware of this rapidly evolving situation.

Remember also that the loan repayment can only be at 50% of the IVA payment so the higher the APR the lower the amount that can be borrowed.

Example:

OK, the variables here are huge, but using some of the figures banded around on this and other forums, fact it (as much as I detest the interest rates and extortionate fees) IT IS cheaper to take out a high APR secured loan over a remortgage in some cases.

Assume an IVA customer and homeowner currently repaying £500pcm into their IVA. Their house is worth £242,400 (about the UK average), but mortgaged at £145,000 at 4.5% apr over 20 Years. Monthly mortgage repayment around £900-£930pcm.

At equity release time, they have to attempt to raise £10K through equity release. (Assuming they meet all affordability criteria).

Choices:

1). Remortgage offered for £155K at 7.55%apr for 25 Years = £1126pcm.

Total repayable: £337,600. Total interest paid £182,600 (as opposed to the £78,000 to £95,000 interest on the 'normal' mortgage). So the remortgage leaves the customer £87,500 worse off at best assuming it goes to term.

2). Secured loan for £10K at 18%apr for 10 Years = £172pcm.

Total repayable: £20,600. Total interest paid £10,600.

Option 2 leaves the customer nearly £77k better off.

...OK, my maths may not be dead-on, but you get the idea.

My contract specifically requires me to attempt a 'remortgage'. From what I understand, a 'mortgage' and 'secured loan' at 2 separate legally defined products.

Therefore, if my IP tries the 'go for this secured loan' approach, I think I would have reasonable grounds to refuse, arguing that the request falls outside the terms of contract.

Saying that, in the (still very unlikely) event of being offered a remortgate at a sub-prime rate, ONLY THEN is it worth looking at the secured loan route as a viable alternative.

Hopefully of course, you get a couple of mortgage application rejection letters, and get a 12-Month IVA extension instead.

In summary, faced with the prospect of a sub-prime mortgage offer (but ONLY if I have a remortgage offer), I know what I'd go for: Give me the loan, as extortionate as it is, any day.

Hi UTMNII

A pretty impressive post on what is becoming a more talked about and crucial issue.

How about the IVA companies and IPs making clear and precise statements on where they stand with the issue of secured loans and equity release in IVAs.

If it states re-mortgage or 12 month extension, then does it mean what it says, yes or no?

Are secured loan brokers approaching IVAers when the above is set out and if so why?

All IVA customers deserve nothing less than full advice, information and transparency on this issue at the outset and during an IVA.

All connections (including financial, fees, commission, everything) between these secured loan brokers, lenders and IVA companies should be made fully transparent.

Those who seek independent, impartial advice debt solution wise do so in good faith and expect the same in return. They are told and expect to be debt free at the end of the terms, that is what they are told.

The whole idea of an IVA (or any debt solution) is to become debt free.

I thought that the whole idea of an IVA is for the benefit of those in debt and the creditors, is this really what we are currently seeing?

I know there will be those that will accuse me of wearing my anti IVA hat but this is nonsense as usual, you only have to look at the contents of my posts to see that I am more than fair as far as the IVA companies are concerned.

There is no such thing as a free IVA and I accept that an IVA can be the right solution and that there are many satisfied IVA customers but issues like PPI and now this on secured loans are areas that need full clarification for the IVAers (yes, remember them, won't you now)

My opinions, take and contribution to this debate here

UpToMyNeckInIt

Hi DC: I am happy that the wording of my 2010-protocol-compliant IVA is clear enough: Remortgage or 12 Month extension.

HOWEVER: If the economic situation in 3-4 Years time (when I will have to attempt equity release), means that I succeed in being offered a sub-prime remortgage: I cannot dictate to my IP 'no thanks, I'll have a 12-Month extension instead'. BUT I could consider raising the required sum using a secured loan, assuming this worked out cheaper.

In summary, I am entitled to REFUSE as secured loan proposal by my IP. If I am unfortunate enough to be successful in applying for a sub-prime remortgage, then ONLY IN THESE CIRCUMSTANCES would I consider a secured loan as an option, because I would not be in a position to 'opt' for a 12-Month extension.

I believe that customers encountering these issues have been referred to these lenders via their IP. now, it might well be that these customers have a pre-2010 protocol IVA with more draconian equity release clauses, to bolster promised minimum dividend. In which case a loan is probably better than having to sell-up - particularly as they seem to have a fair amount of equity - 6-figures in one case.

Saying that, most sympathetic IP's have long-since proposed variations to these clauses to bring them into line with current arrangements. (Whether or not the creditors accpt this is of course another matter in some cases).

An IP on another IVA forum quoted the following:

'If and when the mortgage marketplace relaxes towards people in IVA's, then this may see the time when secured loans become a viable option for persons faced with expensive re-mortgages. Until then, I prefer to treat a re-mortgage as a re-mortgage and not consider a secured loan for any of my clients except in exceptional circumstances.

Having just recently lectured at an R3 conference in Manchester on the subject of IVAs, it is clear that many other influential members of this profession also share my views.'

This leads me to believe that this practice is CURRENTLY the exception rather than the norm. (Indeed, I am only aware of customers of 'DebtFree Direct' feeling unfairly treated).

I appreciate that the job of any IP is to act impartially in both the creditor's and debtor's best interests (mine words it as acting as 'honest broker' between the various parties). By and large, I think they all do.

Charges are clearly outlined in your IVA: Understandably however, the fact that most IP's charge 15% for 'additional realisations' paid into the IVA (ie: anything over and above your minimum agreed dividend), does leave them in an insidious position, potentially open to allegations of maybe not being as impartial as an IVA suggests. But they are probably just that - allegations.

I understand therefore, that the IP only recieves their 15% cut regardless of whether additional dividend is repaid via 12-month extension, remortgage, loan or 3rd Party contribution, not any other commission from the loan company etc.

I take on board your comment about the whole idea of being in an IVA is to become debt free. I submit that it is, but that in doing so you pay back what you can reasoanbly afford.

I, and any other home owners, signed up to the equity release clause, and must be prepared to honour it. (Remember, it is all subject to affordability calculations based on: Max 85% LTV remortgage/sec. loan; Repayment being max. 50% of current IVA payment - with your existing IVA payment reduced accordingly).

That's a point: The higher the APR, the less you can borrow - swings and roundabouts again.

I suppose, trying to be impartial here, I have to see it from the creditor's viewpoint: If someone is 'insolvent', but sitting on a stack of property equity, if some of that can be freed up - affordably, is that not fair? It probably is in many cases.

savingjenny

UpToMyNeckInIt wrote: »

In summary, faced with the prospect of a sub-prime mortgage offer (but ONLY if I have a remortgage offer), I know what I'd go for: Give me the loan, as extortionate as it is, any day.

Well yes, BUT (and it's a huge but) only take the secured loan if it is at a fixed rate of interest. Otherwise you may find it jacked up even if interest rates elsewhere haven't changed !

UpToMyNeckInIt

savingjenny wrote: »

Well yes, BUT (and it's a huge but) only take the secured loan if it is at a fixed rate of interest. Otherwise you may find it jacked up even if interest rates elsewhere haven't changed !

Yes - a very fair point, the variables are huge, but without scrutinising the exact loan terms it is difficult to comment further - nobody mentioned if the rate was variable or not. The quoted example loans I have seen do aparently allow you to repay early though - penalty-free, thus further reducing your interest burden.

The Magellan remortgage IS variable though (LIBOR + 8%!!!). Which actually makes it 8.52% at the moment, not the 7.55% quoted in my calculation.

Depth_Charge

UpToMyNeckInIt wrote: »

Hi DC: I am happy that the wording of my 2010-protocol-compliant IVA is clear enough: Remortgage or 12 Month extension.

HOWEVER: If the economic situation in 3-4 Years time (when I will have to attempt equity release), means that I succeed in being offered a sub-prime remortgage: I cannot dictate to my IP 'no thanks, I'll have a 12-Month extension instead'. BUT I could consider raising the required sum using a secured loan, assuming this worked out cheaper.

In summary, I am entitled to REFUSE as secured loan proposal by my IP. If I am unfortunate enough to be successful in applying for a sub-prime remortgage, then ONLY IN THESE CIRCUMSTANCES would I consider a secured loan as an option, because I would not be in a position to 'opt' for a 12-Month extension.

I believe that customers encountering these issues have been referred to these lenders via their IP. now, it might well be that these customers have a pre-2010 protocol IVA with more draconian equity release clauses, to bolster promised minimum dividend. In which case a loan is probably better than having to sell-up - particularly as they seem to have a fair amount of equity - 6-figures in one case.

Saying that, most sympathetic IP's have long-since proposed variations to these clauses to bring them into line with current arrangements. (Whether or not the creditors accpt this is of course another matter in some cases).

An IP on another IVA forum quoted the following:

'If and when the mortgage marketplace relaxes towards people in IVA's, then this may see the time when secured loans become a viable option for persons faced with expensive re-mortgages. Until then, I prefer to treat a re-mortgage as a re-mortgage and not consider a secured loan for any of my clients except in exceptional circumstances.

Having just recently lectured at an R3 conference in Manchester on the subject of IVAs, it is clear that many other influential members of this profession also share my views.'

This leads me to believe that this practice is CURRENTLY the exception rather than the norm. (Indeed, I am only aware of customers of 'DebtFree Direct' feeling unfairly treated).

I appreciate that the job of any IP is to act impartially in both the creditor's and debtor's best interests (mine words it as acting as 'honest broker' between the various parties). By and large, I think they all do.

Charges are clearly outlined in your IVA: Understandably however, the fact that most IP's charge 15% for 'additional realisations' paid into the IVA (ie: anything over and above your minimum agreed dividend), does leave them in an insidious position, potentially open to allegations of maybe not being as impartial as an IVA suggests. But they are probably just that - allegations.

I understand therefore, that the IP only recieves their 15% cut regardless of whether additional dividend is repaid via 12-month extension, remortgage, loan or 3rd Party contribution, not any other commission from the loan company etc.

I take on board your comment about the whole idea of being in an IVA is to become debt free. I submit that it is, but that in doing so you pay back what you can reasoanbly afford.

I, and any other home owners, signed up to the equity release clause, and must be prepared to honour it. (Remember, it is all subject to affordability calculations based on: Max 85% LTV remortgage/sec. loan; Repayment being max. 50% of current IVA payment - with your existing IVA payment reduced accordingly).

That's a point: The higher the APR, the less you can borrow - swings and roundabouts again.

I suppose, trying to be impartial here, I have to see it from the creditor's viewpoint: If someone is 'insolvent', but sitting on a stack of property equity, if some of that can be freed up - affordably, is that not fair? It probably is in many cases.

Hi

Another interesting and informative post with some good and fair points along with a few clever touches maybe (you should really consider taking up debt advice:)

Yes, I have read what the IP from another forum has put, it looks like a fair and sensible approach to me.

A point that does not seem to make too much sense however is that I don't really understand how firms and IPs can treat their IVA customers in a different way to others on the secured loan and other issues perhaps (if this is happening)

Are there people in IVAs where the clause of re-mortgage or 12 month extension is clear being approached by secured loan brokers and if so why then? whos interest would this be in? and have any of these 'offers' actually been 'taken up' by IVA customers? (if they exist that is:)

Full clarity and transparency regarding charges, fees, referral connections, commission & any financial interest is not an unreasonable request, anything less could be argued as a cop out on the questions in my opinion.

'Pudd' it up:)

My take

UpToMyNeckInIt

I suppose there are inconsistencies on opinion in any profession, why should IP's be any different?

The other thing I forgot to mention is that, before a secured loan can be considered an option, I understand your existing mortgage provider has to agree to a second charge being applied to the property. Easier said than done, I suspect.

So all things considered, I think only a very small proportion of IVA customers will be affected - time will tell.

Depth_Charge

UpToMyNeckInIt wrote: »

I suppose there are inconsistencies on opinion in any profession, why should IP's be any different?

The other thing I forgot to mention is that, before a secured loan can be considered an option, I understand your existing mortgage provider has to agree to a second charge being applied to the property. Easier said than done, I suspect.

So all things considered, I think only a very small proportion of IVA customers will be affected - time will tell.

Hi

On the inconsistencies: Its a cop out answer in my opinion:) I thought this is all supposed to be about independent impartial advice. No doubt people can see straight through it and I thought there were professional bodies representing these companies???

Yes I heard the one about the mortgage lender having to agree on the secured loan issue, looks like a sound record of payment and the amount if equity are crucial - do you know I am sure I have read somewhere that these two areas have been plugged in the targeted 'new product' campaign of secured loans and equity release in IVAs.

I will have a look to see if I can find any info regarding the above on the net, think it was the Select something or other:)

Maybe the secured loan brokers can work to swing things for their customers and in turn collect their 'well earned' juicey fees and commission:)

Yes, you are right on the time will tell

Just my take, point & question raising harmless humour once again

a_summer_place

I'm totally confused as well as broke. Last week in desperation I enquired about the number of bills I was struggling to pay. I googled debt management and gave my details to the first site I saw. They called me the next day and I gave them all my details. They gave me a few options one of which was bankruptcy, which scared the life out me. I V A seemed the best option and later that night I looked at the Martin Lewis website to see what he thought about them. Again I was left feeling uncomfortable and unsure about them. The next week when the advisor called me to see if I was going to go ahead with the I V A I told him I was unsure and had looked at the M. L. website and he told me that the advice was about 7 years out of date. Now I am not just unsure I am doubley unsure about who to seek advice from.

UpToMyNeckInIt

Hi Summer Place,

You might get a bigger response if you start your own thread, or have a look at the 'IVA Support and Discussion Thread', and add your query there.

Before anyone can sensibly comment, it might be handy if you provide a little more detail like: how much debt you have, your approx income, and other factors such as assets that may be take into consideration: property, cars etc.

The IVA guide on this site is quite anti-IVA biased in my opinion, and factually inaccurate in parts.

Entering an IVA is a good solution for some, but it won't be the bed of roses that some companies may have you believe either, so you are right not to rush into it.

Also, speak to more than one IVA firm: Google 'insolvency practitioner reviews'. 4th result down, takes you to a pretty good review site.

Worth speaking to the debt charities: Stepchange, National Debtline, as well as your local CAB. You may get a huge spread of opinions: Take them all on board, and make a decision that is best for you.

Good luck.

UpToMyNeckInIt

DC: You touch on another good point about a customer's 'sound record of payment'. Indeed, to be eligible for this particualr remortgage product, the 'applicant must not have missed any secured borrowing payments in the last 12 months'.

So simple then to get out of it: If an IVA customer thinks they are likely to get offered this sub-prime mortgage, they simply need be a couple of days late paying ther existing mortgage.

OK, they might end up paying a penalty fee or a small amount of interest. But they also get a nice red flag on their credit file rendering them ineligible for this sub-prime product. Thus forcing their IP's hand to go with the 12-Month extension instead, saving: £thousands...

I have mentioned in an earlier post (some Months ago) that even sub-prime lenders have lending criteria like: 'Not missing a loan/credit card repayment in the last 6 months' (quite a common one that); or not going into 'unauthorised overdraft'.

So another option, if you have the £500 credit limit clause in your IVA, is to get a Vanquis Credit Card (accepted me, no bother) or similar, spend £10, be late paying it back the following month, incur at £12 'late fee' + a couple of quid in interest, and again you have rendered yourself ineligible for a lot of loans.

Alternatively, just go say £20 overdrawn for a few days.

...or do a combination of the above. Each one is easy to remedy.

(NOTE: in all cases, I am only suggesting being no more than a few days late, paying back whatever. I would never advocate going into a bad debt situation).

I would even suggest that even if this risked technically 'breaching' your IVA, accidentally-on-purpose having a 'bad month' is such a small, easy to fix breach, that your IVA will not be in danger of being terminated.

Just a suggestion or two for people feeling 'compelled' to take out a sub-prime loan or remortgage.