Thousands of people with a history of personal insolvency face an interest rate double whammy in the next 12 months.

Under the terms of their individual voluntary arrangements, they have to realise some of the equity in their properties and put the money towards paying off their debts.
However, the new mortgages they must take out will probably be at higher rates than their existing loans because of the credit crunch. On top of this, borrowers face being reclassified as 'sub-prime' customers and be charged even more.

IVAs are an alternative to bankruptcy under which the lender agrees to a repayment scheme for some of the debt in return for the lender, usually a bank, writing off the rest. Though they have been available since the Eighties, IVAs took off in a big way only about five years ago.

Standard IVAs include a clause under which the borrower, should they be a homeowner, will release equity from their home to help reduce their debt. This release is usually in the final year of the IVA, meaning the first wave of such remortgaging will be taking place in the next 12 to 18 months.

One senior source in the insolvency advice business 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.'

However, because all IVAs contain a clause stating that borrowing for this equity release must be 'affordable', some people in IVAs may say they cannot afford the second mortgage. If this can be proved, the lender must write off the money it had expected.

Andrew Smith, marketing director with leading debt advice company ClearDebt, said: 'Banks have agreed to take this on the chin.' The British Bankers' Association said there was no sign yet that member-institutions were concerned about a shortfall.


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