Awareness over Individual Voluntary Arrangements, or IVAs, has increased over the last couple of years, with a number of firms putting out advertisements relating to this type of debt solution. An IVA is known as a softer alternative to bankruptcy and is designed to help those in high levels of unsecured debt to get out of debt more quickly.

The term of the IVA is usually five years, and eligible consumers agree to make a set repayment each month, which is then distributed amongst the different creditors. The remainder of the debt following the specified term is then written off, leaving the borrower debt free.

The good thing about an IVA is that the person entering into the agreement does not have to lose their home in the event that they are a homeowner, and this comes as welcome relief to many homeowners who have huge unsecured debts that they can no longer manage to pay, as it gives them a chance to cut back their outgoings and get out of debt within the space of five years.

However, there is a downside, and this has been highlighted in a recent report, which claims that some homeowners that have entered into an IVA could soon find themselves having to pay a fortune in mortgage interest as the result of a clause that is in the IVA agreement. As part of the IVA the homeowner has to use the equity in his or her property in the last year of the agreement in order to put towards their debt, and experts have stated that this could cause a problem for some homeowners, as it could cost them dearly in terms of interest.

According to reports having to borrow against the equity in the home in the last year of the agreement means that some homeowners will have to take out a mortgage or secured loan at a far higher rate than the one that they currently have, and this is due to rises in interest rates. However, it does not end there. Another problem that these people are likely to suffer is the fact that they will be classed as high risk borrowers due to their IVA, and this means that they will be hit by even higher interest rates when borrowing against the equity in their homes.

An industry official from an insolvency firm recently stated: ‘There is a problem here. People in an IVA will be remortgaging into something significantly more expensive. Not only are mortgage rates higher than when these people bought their houses, but they could well be classified as sub-prime - that is to say as riskier borrowers who need to be charged more to compensate for that risk.’

IVA homeowners that are looking to borrow against the equity in their homes as part of their IVA agreement are advised to shop around and compare different mortgages or secured loans in order to find the most competitive deal, although they should be prepared for the higher interest rates that will be charged due to market conditions and due to their sub-prime status.

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