Shawbrook Bank has launched an 80% loan to value secured loan product designed to allow borrowers to settle an Individual Voluntary Arrangement.
The release of the product follows a two year campaign by Shaun Vickery, managing director of The Select Partnership, to persuade lenders to offer refinancing options to IVA clients.
Vickery said the attitudes which lenders have towards customers who have had IVAs are misguided.
He said: “It is based on a lack of understanding of how IVAs work and the judgement that clients who have entered into an IVA five years ago are still a risk today.”
Vickery explained that if a customer enters into a bankruptcy in 2013 he will be discharged by 2014 and in 2020 he will be considered by a mortgage lender for secured finance.
He added: “But if he enters into an IVA, whereby he does not throw his hands in the air and admit defeat, and attempts to repay as much of the debt as he can afford he is penalised in a much more severe manner.”
The standard IVA contract will run for a period of five years after which time a customer is required to try and release equity to repay the remaining debt, up to a maximum LTV of 85%.
As the contracts which are now reaching their fifth year were written in 2007, when the market was more buoyant and competitive, this requirement was considered to be easy to comply with.
However as it is no longer an option to release equity to repay the agreement the insolvency practitioner can either agree an extension of one year after which the debt is written off or they can move to file for bankruptcy.
Vickery said: “This is when the clock starts ticking for an IVA customer. After six years of paying into the IVA they then have to wait for another six years for lenders to consider them a safe bet, that takes them to 2025 compared to 2020 for an ex-bankrupt.”
And the lack of options available to an IVA client are making creditors nervous about entering into an IVA because the likelihood of the balance being repaid is minimal.
He added: “Shawbrook really understand the need for a product of this nature and understand that ex-IVA customers are not a risk but can provide a proven history of regular repayments.”
Maeve Ward, head of sales for secured lending, said: “This market is underserviced and as Shaun Vickery points out, other lenders shy away from offering a competitive solution for clients. At Shawbrook we take the time to understand and assess the needs of clients as well as identify gaps in the market.”
Shawbrook will operate with controlled distribution on this product as it only wishes to partner with experts in the field of insolvency.
Ward said: “This is not a product we would offer to the whole of the market we believe there are a few specialists in this arena that are best placed to provide us with responsible cases.”
Vickery has worked closely with Shawbrook for the past two years on the development of this product and for the past 12 months has been submitting cases of this nature to the lender on a trial basis, which he confirmed have all performed well.
There are various reasons why a secured loan provides a better solution in the vast majority of cases in order to settle an IVA.
This is in particular because a remortgage to settle an IVA is likely to force the debtors to accept a significantly higher rate of interest on their mortgage whereas their existing mortgage will more often than not be a competitive mortgage taken prior to their IVA.
There’s also the probability of them being locked into this higher rate for a long period with the likelihood of higher than normal early redemption charges whereas none apply to the secured loan product offered with Shawbrook.
Vickery is continuing his campaign to get lenders to understand and serve IVA customers to create more choice for consumers and to prevent creditors refusing to enter into an arrangement because they is no promise of an eventual settlement.