Homeowners that have entered into an IVA, or Individual Voluntary Arrangement, could face soaring interest charges on their mortgage as the result of a clause in the agreement that requires them to use the equity in their home to put towards their debts. An IVA is known as a softer alternative to bankruptcy, and those entering into this sort of agreement pay a set amount per month for a period of five years after which the remainder of the debt is written off.

However, for those that are also homeowners there is a clause in the agreement that requires them to use the equity in their home during the last year of the plan in order to reduce their debts further. For many homeowners on IVAs, this will mean soaring interest rates, as they could be hit by increased rates twice.

Interest rates have soared over the past couple of years, and whilst the base rate has been cut twice since December it is still much higher than it was before August 2006, when the rate hikes began. Those looking to borrow against the equity in order to honour their IVA agreement face having to pay higher interest rates because of the rate hikes and the global credit crunch, which has seen many lenders increase their standard variable rates.

In addition to this many of these homeowners will find that they are now classed as sub-prime lenders, and as a result will pay an even higher rate of interest.

One insolvency professional 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.’

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