Many struggling borrowers in the UK have entered into an IVA over recent years, with awareness about this process having been raised through a series of advertisements put out by IVA firms. An IVA, or Individual Voluntary Arrangement, is a legally binding agreement that is known as a softer alternative to bankruptcy. This process is designed to help those with a high level of unsecured debt to benefit from more affordable monthly repayments and to get out of debt more quickly.

However, industry experts state that there could be a problem if you have entered into an IVA and you are a homeowner. The IVA does not require the homeowner to sell their home, but there is a clause in the agreement that requires them to use the equity in their home to put towards their debts in the final year of the programme. The IVA usually lasts for five years, and in the final year homeowners will have to borrow against any equity in their home to pay some more towards their debts, and this could prove very costly.

For many homeowners in an IVA programme interest rates are far higher now than they were when they originally took out their mortgage, and for many this may mean having to remortgage on a much higher rate, or borrow money against their equity at a higher rate. In addition to this, the consumer will be charged additional interest as a result of being classed as a sub-prime customer due to being in an IVA programme.

One industry official 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.’

Recent additions:

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• IVA homeowners could face problems

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