...I just hope that it helps arm affected IVA customers with a little useful information.
Now excuse the long post, but here is the flip-side of the argument to illustrate my point.
I am not blindly defending secured loans (I have made my distaste of the sky-high interest rates and fees known!). But there are people in IVA's, who have signed up to releasing equity with no intention of doing so, ie: gambling on the assumption (a reasonable one in many cases) that they will just get a 12-Month extension instead.
There will of course be more equity release vehicles products available as the housing market frees up, with the advent of the 2014 protocol and as banks continue to relax mortgage criteria. Those of us that may fall foul of the equity release provision should keep a watchful eye on this rapidly evolving situation.
Remember though that strict affordability criteria set out in the IVA apply: The loan repayment can only be at 50% of the IVA payment so the higher the APR the lower the amount that can be borrowed.
Example:
OK, the variables here are huge, but using some of the figures banded around on this and other forums, fact is, IT IS cheaper to take out a high APR secured loan over a remortgage in some cases.
Assume an IVA customer and homeowner currently repaying £500pcm into their IVA. Their house is worth £242,400 (a bit less than the UK average), but mortgaged at £145,000 at 4.5% apr over 20 Years. Monthly mortgage repayment around £900-£930pcm.
At equity release time, they have to attempt to raise £10K through equity release. (Assuming they meet all affordability criteria).
Choices:
1). Remortgage offered for £155K at 7.55%apr for 25 Years = £1126pcm.
Total repayable: £337,600. Total interest paid £182,600 (as opposed to the £78,000 to £95,000 interest on the 'normal' mortgage). So the remortgage leaves the customer £87,500 worse off at best assuming it goes to term.
2). Secured loan for £10K at 18%apr for 10 Years = £172pcm.
Total repayable: £20,600. Total interest paid £10,600.
Option 2 leaves the customer nearly £77k better off.
...OK, my maths may not be dead-on, but you get the idea.
In summary, if I were a customer faced with the prospect of a sub-prime mortgage offer (but ONLY if I have a remortgage offer), I know what I'd go for: Give me the loan, as extortionate as it is, any day.
Hopefully of course, when my time comes, I will get a couple of mortgage application rejection letters, and a 12-Month IVA extension instead.
My opinions are just that: Based on my experience and being a self-employed IVA customer.
