Credit problem customers could pay a fortune on their mortgage interest rate

A recent report has highlighted how homeowners that have entered into an Individual Voluntary Arrangement could end up paying a fortune on their mortgage interest rate due to a clause in the IVA agreement that requires them to use the equity in their homes to repay some of the debt in the final year of the agreement.

Known as a softer alternative to bankruptcy the IVA agreement lasts for five years, and at the end of the term any remaining debt is written off.

However, it is a requirement for homeowners to use the equity in their property in the final year to put towards their debt.

This means that homeowners on IVAs will face having to pay a fortune in interest, as they will have to borrow against the equity in their home at a time when interest rates are much higher than when they originally took their mortgage, and will also be hit harder because of their bad credit profiles.

One industry official said: ‘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.’