An Individual Voluntary Arrangement (IVA) is an insolvency solution which helps individuals to avoid bankruptcy. It is a formal and legally binding agreement between debtors and creditors, usually managed by an insolvency practitioner, which sets monthly payments to be made until the debt is settled.
Creditors cannot take any further action once an IVA is in place, typically for five or six years. It will affect your credit rating, can be extended if payments are missed and will be formally recorded on the Individual Insolvency Register in England and Wales.
More on IVAs later. They are designed to help individuals manage debt repayments and avoid these spiralling out of control. However, many people may look to finance a property using a mortgage once the IVA period is over.
Before the banking crisis, banks and building societies were much more relaxed about their lending processes, which led to what became known as the ‘subprime crisis’, with mortgages extended even to people with a poor credit history.
Today, financial institutions practice a code of caution, which means any adverse event on your credit file can present a difficult hurdle to overcome. This is where a specialist bad credit mortgage advisor might be the answer.
What is an IVA
An IVA is a legal agreement designed to help people write off unaffordable unsecured debt by coming to a formal arrangement and payment plan with creditors to make monthly affordable repayments, with no additional interest or charges.
An IVA will be set up by an Insolvency Practitioner (IP) who will deal with you and your creditors to set up monthly repayments at a level deemed affordable. At the end of the agreed IVA period, any remaining debt will be written off.
When subject to an IVA, most of your income after living costs will go towards your payments. This means you won’t be able to spend money on cars, holidays and eating out, and your insolvency practitioner will need to permit you to borrow money for amounts greater than £500.
How long does an IVA last?
A standard IVA usually lasts for five years and involves 60 monthly repayments at an agreed level. This period may be extended to six years if you have a payment break over the term, or request reduced payments for any mitigating reason.
Your IVA will remain on your credit file for six years, irrespective of whether you complete the five-year term as agreed and have made all the necessary payments or require an additional twelve months. It will also appear on the Individual Insolvency Register for the term of your agreement plus three months. This register is open to employers, lenders and landlords to verify insolvency details.
Does an IVA affect your credit score?
In short, yes and always. It will reduce your credit score, remain on your financial history and impact upon your chances of securing a mortgage. It will be visible on your credit report for six years and will affect your chances of accessing almost every type of finance.
“In 2023, 64,050 individual voluntary arrangements (IVAs) were registered in England and Wales so you’re not alone.” Gavin Watson, Mortgage Advisor
All lenders will check your credit file when making decisions about whether to lend. Having an IVA on file shows that you have experienced unresolved debt in the past, and will influence lenders considering entering into a credit agreement with you.
How long will it remain on your credit file?
IVAs remain on your credit report for six years.
Can you still pass a credit check with an IVA?
This will vary from lender to lender, but it will be a significant challenge. Even the most lenient lenders and specialist lenders will require an IVA to have been discharged for at least three years before they will consider an IVA mortgage application, and many ask for as long as six years.
After this period, higher deposits may be required (nearer to 15% rather than 5%) and the credit scoring would need to have recovered substantially following the IVA.
Can you get a mortgage with an IVA
Although this is technically not impossible, even the more specialist mortgage lenders will be reluctant to advance a mortgage while you are still under the terms of an active IVA and still insolvent with a reduced income due to your monthly IVA repayments.
A specialist mortgage lender may be able to assist, depending upon where you stand in terms of completion of your IVA and what percentage of the original debt has been repaid. However, as a high-risk borrower, your options will be limited and you must expect both higher interest rates and deposit requirements for a mortgage with an IVA.
Can I get a mortgage after an IVA?
Yes, but as detailed above you must expect higher interest rates and larger deposit requirements in terms of loan-to-value for an IVA mortgage. Even by specialist lenders, you will be viewed as a higher-risk borrower due to experiencing financial difficulties in the past.
Remember that even if the IVA is no longer on your credit report, you need to inform potential lenders that you have been subject to an IVA.
When can I apply
There are no hard and fast rules about when you can apply for a mortgage once your IVA is completed. It’s a good idea to employ a specialist mortgage broker like Mortgage360, who will help you to complete the various applications fully and honestly. As stated, you must always declare that you have had an IVA, otherwise you are committing fraud.
How far the IVA is in your past, and your credit score since the individual voluntary arrangement period, will be important considerations for lenders and will determine your loan terms. You will be able to access a wider range of lenders once three years or more have elapsed for the most favourable deal.
Let’s take a look at the anticipated timeline for applying for a mortgage with an IVA.
Still within an IVA
If you are still within the IVA period, it will be extremely difficult to find a lender willing to consider your application because of the adverse credit. It’s also important to remember that you cannot use this money to pay off an IVA.
One year later
After a year, your options will be slightly less limited, but you will still be subject to significantly higher interest rates and deposit requirements from only a handful of subprime lenders, even if you can find specialist IVA mortgage lenders willing to lend, as well as strict affordability checks.
Three years later
After three years, more lenders will be willing to consider your application, but you will still be considered a higher-risk borrower and subject to less favourable loan terms.
Six years later
Once you reach the six-year marker and your IVA is removed from your credit file, then the market is a different place with many lenders and access to more mortgage products, but you will still need to demonstrate your ability to meet the lender’s affordability criteria and to make the required repayments.
It’s well worth planning, saving and improving your credit score before making an application for a mortgage with an IVA so you can secure a favourable deal.
How will an IVA affect my existing mortgage?
Many people are afraid they will have to sell their homes and repay their existing mortgages if they enter into an IVA. However, your assets are protected under the terms of an IVA and you will not be forced to sell your house.
However, if you do have a mortgage and equity in your property, you may be asked to release some of this equity during the final year of your IVA. Discuss this with your insolvency practitioner to understand how this may affect you.
Do IVA mortgages have higher deposits and interest rates?
Unfortunately, yes, as you will be viewed as a high-risk borrower and will be unable to access most of the more favourable deals available from high-street lenders.
In addition, you will likely be expected to put down a significantly higher loan-to-value deposit. Talk to your mortgage broker about what is available and how to approach the challenges.
Improving your credit score after an IVA
Don’t despair, there are many things you can do to improve your credit rating and credit reports when you are coming out of an IVA to show you are financially responsible and can manage your debts to secure a mortgage after an IVA.
- Remember to apply for an IVA completion certificate as proof you have met the requirements and successfully kept your side of the bargain.
- Pay off any other debts you may have including overdrafts and credit cards. This will reduce your debt-to-income ratio – an important consideration for mortgage lenders.
- Work to rebuild your credit record to demonstrate your ability to manage credit responsibly. Make payments on time, including utilities and rent and keep any credit card balances low.
- Support this work by checking your credit score regularly with the main credit reference agencies so you can identify and correct any errors.
- Make sure you’re on the electoral register – this impacts your credit record and credit history. Where possible, try not to move too often as this can be viewed adversely by lenders.
- Maintain a stable income and consistent employment record, and keep copies of all relevant documentation to provide proof of income.
- Save! Having a bigger deposit will make your application a more attractive proposition, and may also mean you have access to better interest rates and more product choices.
- Avoid mainstream lenders. Take advice from independent specialist mortgage brokers who have experience in this field and will be able to assess your application potential and know who to approach on your behalf.
Summary
It is a significant challenge to secure a mortgage application when you are subject to an IVA, but not impossible if you use specialist help from a mortgage broker using adverse credit lenders. The process will become easier once the IVA is completed.
Talk to us here at Mortgage360, if you are coming to the end of an IVA and looking to secure a mortgage after an IVA.
The information contained within this article was correct at the time of publication but is subject to change.
Your home may be repossessed if you do not keep up repayments on your mortgage.
