While you’re in an IVA, your credit score will be negatively affected and you’ll be unable to borrow large sums of money. This is a small price to pay to be able to write off your unaffordable debt, but it can impact any major life plans you have, including getting a mortgage.
Having an IVA indicates that you’ve struggled with debt and you might therefore find it difficult to keep up with another credit agreement. However, your chances of getting approved for a mortgage will dramatically improve once you’ve completed your IVA and all evidence of it has been removed from your credit record.
What is an IVA?
An Individual Voluntary Arrangement (IVA) is a legally binding agreement between you and the people you owe (your creditors) to repay your unsecured debt through a series of fixed monthly payments over a set period.
Because IVAs are legally binding, they can only be set up and managed by an Insolvency Practitioner (IP). They will act as a third party between you and your creditors and assess your financial situation to ensure they set your monthly payments at a rate you can comfortably afford.
While you’re in an IVA, all interest and charges will be frozen and your creditors will stop pursuing you for the debt. Once you’ve made your final payment, any remaining debt will be written off and you’ll be free to make a fresh financial start.
How much debt do you have?
How long does an IVA last?
Most IVAs last five years – which is equivalent to 60 monthly payments – but your arrangement can be extended by an extra 12 months if your repayments fall short of what was originally outlined in your IVA proposal.
This might happen if you request lower monthly payments, you have a temporary payment break, or you fail to release equity from your home during the final few months of your arrangement. The extra year will then be used to make up the outstanding balance.
Once your IVA starts, it will be added to your credit file for six years. This means that, if your IVA lasts the standard five years, it will remain on your credit file for another 12 months after you make your final payment.
As well as your credit file, your IVA will also be added to the Individual Insolvency Register (IIR) until three months after your arrangement ends. This is a publicly accessible database containing details of all insolvencies in England and Wales, but it is usually only visited by lenders, employers, and landlords if they need to verify details of your insolvency.
How will an IVA affect my credit history?
During the six years an IVA is visible on your credit file, your credit rating will be negatively affected and you’ll struggle to get a lender to approve you for most types of credit, such as a loan, mortgage, phone contract, and bank account.
Lenders check your credit file when deciding whether to let you borrow money and any evidence of an IVA will indicate you’ve struggled with debt. This will make lenders wary of entering into a credit agreement with you because there’s a higher chance of you defaulting on your payments and them not being paid what they’re owed.
Once your IVA has been removed from your credit report, there won’t be any evidence of your IVA anywhere and you’ll be free to start rebuilding your credit score. This is why most people wait until their IVA has been removed from their credit file before submitting a mortgage application. In most cases, this will happen six years after you begin your arrangement.
However, it’s worth noting that all debt solutions affect your credit rating in one way or another and having an IVA can prove to lenders that you’re actively taking steps towards repaying your debt.
Can I get a mortgage with an IVA?
During an IVA, you’ll be expected to put the majority of your disposable income towards paying off your debt. This means that you won’t have much money to spend on luxury items, like holidays, cars, or eating out, and you’ll need permission from your IP if you want to borrow more than £500.
Most lenders will be hesitant to enter into a credit agreement with you while you’re still insolvent because they know that your income will be reduced while you’re making repayments and you’ll likely struggle to afford your monthly mortgage payments.
The main aim of an IVA is to help you repay your unsecured debt so a mortgage could put your entire arrangement at risk by meaning you have less money to put towards debt repayment each month. Even if you’ve repaid most of your debt and your IVA is close to completion, a standard mortgage company is still likely to reject your application.
However, while it can be difficult to get a mortgage with an IVA, you can boost your chances with a specialist mortgage lender. Specialist IVA mortgage lenders and specialist mortgage brokers tend to be a little more flexible and can help you access the best deal for your financial situation.
Applying for a joint mortgage with someone who has a healthier credit score (e.g. no history of debt) might also boost your chances of being approved as the lender might be less worried about the account defaulting if there are two people responsible for making payments.
The range of options available to you will depend on several factors, such as how long you’ve been in an IVA and how much of the debt has been repaid, but most IVA mortgages come with higher interest rates as you’ll still be viewed as a high-risk borrower.
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Can I get a mortgage after an IVA?
Whether or not you can get a mortgage after an IVA usually depends on how long after your final payment you wait to apply.
Remember, if you complete your IVA within five years, it will still be visible on your credit file for another 12 months. Most lenders will be nervous about lending to someone with such recent debt problems and will recommend waiting at least another year until your credit score has improved before you reapply.
However, you should have no problem applying for a mortgage once your IVA has been removed from your credit file and you’ve had time to rebuild your credit score. There should be no evidence of the IVA after 12 months after your arrangement concludes.
Some lenders will ask if you’ve ever been in an IVA. When this happens, you must be open and honest about the financial difficulties you’ve faced and how recent the debt was. This might determine the outcome of your IVA as well as the terms offered to you.
Once your IVA has been removed from your credit file, it’s recommended to start increasing your credit rating before applying for a mortgage. This will prove to lenders that you’re committed to improving your financial situation and are a responsible borrower.
How will an IVA affect my existing mortgage?
Entering into an IVA as a homeowner can raise questions about how it might affect your home, living situation, and mortgage.
However, unlike bankruptcy, your assets are protected in an IVA and your mortgage payments will be factored into your budget. This means you’ll never be forced to sell your home to repay your debt and can continue living in your current property for the duration of your arrangement.
The only time your mortgage will come into play is during the final year of your IVA if you’re asked to release some of the equity within your home. This will only happen if you have a significant amount of equity in your home, but it will give your creditors a final chance to recover as much of the debt as possible before your IVA ends and it’s written off.
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How can I improve my credit rating after an IVA?
There are various steps you can take to improve your credit rating after an IVA. Here are some of the things you should do after your IVA comes to an end:
Apply for a completion certificate
Once you’ve made your final payment, you will be sent a completion certificate in the post. This is an official document that recognises that you’ve successfully completed your IVA and don’t need to make any further payments.
Some people assume that a completion certificate will be automatically issued as soon as they’ve made their final payment, but this isn’t always the case. The general advice is that, if you haven’t received your completion certificate within three months of making your final payment, you should chase it up with your IP.
There are many reasons why your completion certificate could be issued late. Usually, it’s delayed because there are still assets that need to be realised or your IP is still confirming that you’ve made all your agreed payments.
Register to vote
When you register to vote, your electoral details will be added to your credit report. Then, when you apply for a loan, mortgage, or phone contract, lenders will use the information contained on your credit report to verify your name and address.
This will confirm that you are who you say you are and reduce the risk of identity theft and fraud, boosting your credit score and increasing the chances of being approved for various credit products.
The more information lenders have, the more security they’ll have, and the more confident they’ll be in lending to you.
Check your credit report for errors
Most people assume that all the information contained on their credit report must be accurate because it’s compiled by credit reference agencies. But while it is rare, errors can and do happen.
Even minor errors, such as a misspelt surname or an old address, can lead to inconsistencies between your mortgage application and your credit report, and this can be enough for a lender to refuse your application.
Regularly checking your credit report can help you stay on top of your credit score and prevent a mistake from going unchecked. When you notice something that doesn’t look right, contact the relevant credit reference agency as soon as possible with proof of the mistake to allow them to update your record.
Limit your credit applications
Every time you apply for credit, a lender will perform a ‘hard check’ on your credit file. This is a complete review of your credit history and will harm your credit score for a limited time.
Making too many credit applications after an IVA will also indicate to lenders that your financial situation is still poor and this can prevent you from getting further credit if and when you need it.
However, if you just want to compare interest rates, you can ask your lender to perform a ‘quotation search’ or ‘soft check’ instead. This is a partial review of your credit history and won’t show up on your credit history or harm your credit score.
Stick to a budget
Budgeting can allow you to allocate money for essential expenses (e.g. housing, utilities, and debt repayment) and non-essential expenses (e.g. entertainment, travel, and eating out).
This can ensure you don’t run out of money before your bills are due, which can prevent you from ending up in a situation where you’re forced to borrow more to cover the cost.
Remember, improving your credit score can be a slow and steady process and your credit history won’t increase overnight. However, the sooner you make positive changes, the closer you will be to getting a mortgage.
Conclusion
An IVA can make it difficult to get approved for a mortgage as it shows lenders that you’ve struggled with debt and are unlikely to afford another monthly payment.
Contacting a specialist mortgage broker or lender can boost your chances of getting a mortgage with adverse credit. They cater to individuals with damaged credit scores due to debt, but they’ll likely apply stricter terms and a higher interest rate to cover the extra risk.
Getting a mortgage during an IVA can be extremely difficult – even with specialist mortgage lenders – but you should have no problem getting a mortgage after you have successfully completed your arrangement and your credit score has improved.
